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Industries Inc. ABC

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Part 1
Industries Inc. manufactures 2 products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volume:
Product A Product B
Production volume(units) 2000 4000
Direct labor hours used 2 3

Direct material cost per unit $40 $60

Direct Labor cost: $12 per hour
2 hours at $12 $24
3 hours at $12 $36

Manufacturing overhead
2 hours at $100 $200
3 hours at $100 $300

Manufacturing overhead is budgeted at : $1,600,000

a. Using direct labor hours as the base for assigning manufacturing overhead cost to products, compute the direct labor needed and the predetermined overhead rate using direct labor hours.
Hint: the predetermined overhead rate you compute should be $100, since I have given you the answer but I want to make sure you know how to determine the $100.
Direct labor hours, budget hours
Product A
Product B
Total direct labor hours

"Predetermined Overhead
rate" per direct labor hour
b. Using the predetermined overhead rate you determined in "a" above, determine the unit product cost of each product.
Hint: Don't forget that unit product cost includes direct material, direct labor, and Manufacturing overhead. Don't make this complicated, since the numbers are already there for you.

Product A Product B
Direct material cost per unit
Direct labor cost per unit
Manufacturing overhead per unit
Total product cost per unit

c. You are a recent hire to Industries Inc. and you have made it known that you just recently completed an MBA program that had a management accounting
course that taught you about another costing system that might be appropriate. During a meeting, you suggested that an ABC system might be a more
accurate costing system. Management has asked you to recompute the unit cost using the ABC costing approach, since the company is showing declining profits.
First complete the following chart that is set up like exhibit 5-7 on page 177, and there is a more detailed explanation of the 3 step calculation approach example
on page 176 exhibit 5-6. I have highlighted the columns in red you need to complete and I have started the table to guide you.
Activity Activity Cost pool Cost driver Cost Driver Quantity Pool rate Product line "Cost driver
quantity for product line" "Activity cost
for product line" "Product
volume" "Activity cost per unit
of product"
Setups $180,000 Number of setups 120 $1,500 Product A 100 $150,000 2,000 $75.00
Product B 20 4,000
Total 120
General Factory 1,300,000 Direct labor hours 20,000 Product A 5000 2,000
Product B 15000 4,000
Total 20000
Machine processing 120,000 Machine hours 3,000 Product A 2200 2,000
Product B 800 4,000
Grand Total $1,600,000

d. Complete the following table to determine the unit product costs from ABC, just like the exhibit 5-8 on page 178

Product A Product B
Direct material cost per unit
Direct labor cost per unit
Total direct costs per unit

Manufacturing overhead(based on ABC)
General Factory
Machine processing
Total product cost per unit

e. Write a short report (at least 75 words) that identifies factors that may account for the company's declining profits.


Part 2
Food services company is looking at the costs involved with their catering services.
In the past the company has used meals produced as the cost driver for Overhead costs, but you have been recently
hired as a consultant and have decided to use your new MBA skills to make a recommendation to management on what should be the cost driver(s) for
overhead costs. You have decided to include number of deliveries in your analysis, too.

Month Deliveries "Meals
produced" "Total
1 1,340 12,690 $69,094
2 1,180 11,980 64,927
3 1,050 10,950 60,332
4 930 10,280 57,953
5 840 9,020 55,984
6 780 8,130 53,119
7 700 7,540 52,706
8 630 6,980 53,874
9 680 8,930 53,445
10 760 9,800 54,869

1. Prepare 2 scattergraphs and 2 simple regression analyses***** to estimate the Overhead costs using each of the cost drivers above. Make sure you show the equation of the line and R-squared on each of your scattergraphs.
I have gone ahead and developed the simple regression table and the scattergraph using Meals produced as the cost driver (I.e. independent variable)
You do not need to redo these, but you may want to use these as a verification that you know how to develop a scattergraph and a simple regression table.
The output and chart for your simple regression should be on separate sheets that should be named appropriately.
Type the equation of the line under the regression output on each of the simple regression worksheets.
To make a scattergraph with data from nonadjacent columns highlight the X data (i.e. independent variable-cost driver) first and then hold down the
control (ctrl) key and highlight the Y data (i.e. the dependent variable-cost).
If you have done your scattergraphs correctly the equation of the line and the R-squared should match the output you have on your regression table.
(i.e. R-squared, Intercept, and X Variable.) Hint: the Y(dependent) variable is the same in all your scattergraphs and regression analyses.
2. Prepare a multiple regression table the 2 independent variables-Deliveries and meals produced. Do not try to prepare a scattergraph, since you can make a chart with multiple X's.
Using the output from the multiple regression, give the equation to estimate overhead costs in terms of these 2 cost drivers. Excel reads left to right, so X1 will be Deliveries and X2 will be meals produced.
Type out the equation of the line on your multiple regression worksheet.
3. Assuming the following level of cost-driver volume, what is the estimated overhead
cost using simple regression for each of the cost drivers and using multiple regression to estimate the cost of overhead. You should have
3 computations for this answer (you need to determine 2 since I have calculated the first one for you).
Your calculation should only use cell references, since you should be estimated the cost by referencing the cost drivers below and the output from the regression tables.
Cost Drivers (independent variables):
Meals produced 11,600
Deliveries 1,060

Meals Produced

You need to answer:

Multiple regression

4. Using the simple and multiple regression analyses above, what would you recommend
to estimate the Overhead Costs? Why? Make sure you discuss the Coefficient of Determination in your response.

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Solution Summary

This shows you how to compute the activity based costs in Excel plus graphing of regression output to select the best cost driver for the firm. This is done by finding the best R square. Computations are in the cells (click in cells to see).

Solution provided by:
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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