Explore BrainMass

Explore BrainMass

    Traditional costing and Activity Based Costing

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Stellar Stairs Co. of Poway designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Its budgeted manufacturing overhead costs for the year 2006 are as follows.

    Overhead Cost Pools Amount
    Purchasing $ 57,000
    Handling materials 82,000
    Production (cutting, milling, finishing) 210,000
    Setting up machines 85,000
    Inspecting 90,000
    Inventory control (raw materials and finished goods) 126,000
    Utilities 180,000
    Total budget overhead costs $830,000

    For the last 4 years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted. Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Lindsay Baker, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar's request, Lindsay and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

    Activity Cost Pools Cost Drivers Expected Use of Cost Drivers
    Purchasing Number of orders 600
    Handling materials Number of moves 8,000
    Production (cutting, milling, finishing) Direct labor hours 100,000
    Setting up machines Number of setups 1,250
    Inspecting Number of inspections 6,000
    Inventory control (raw materials and finished goods) Number of components 168,000
    Utilities Square feet occupied 90,000

    Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason's request, Lindsay prepares cost estimates for producing components for 280 stairs so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways.
    Direct materials $103,600
    Direct labor $112,000
    Machine hours 14,500
    Direct labor hours 5,000
    Number of purchase orders 60
    Number of material moves 800
    Number of machine setups 100
    Number of inspections 450
    Number of components 16,000
    Number of square feet occupied 8,000

    Instructions for a
    A. Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
    (a) Predetermined...

    $xxx ÷ xxx hrs. = $xx.xx per machine hour

    Instructions for b
    B. What is the manufacturing cost per stairway under traditional costing?
    (b) Cost/stair $1,199.82

    (b) Manufacturing cost per stair under traditional costing:

    Direct materials $xxx,600
    Direct labor  xxx,000
    Overhead (xxx X $8.30)  xxx,350
    Total cost of 280 stairs $xxx,950

    Cost per stair ($xxx ÷ 280)  $1,199.82

    Instructions for c
    C. What is the manufacturing cost per stairway under the proposed activity-based costing? (Prepare all of the necessary schedules.)
    (c) Cost/stair $1,055.54
    (c) Manufacturing cost per stair under activity-based costing:

    Computation of Activity-Based Overhead Rate

    Activity Cost Pool Estimated
    Overhead
    ÷ Total
    Estimated Drivers
    = Activity-Based
    Overhead Rate

    Purchasing
    Handling materials
    Production
    Setting up machines
    Inspecting
    Inventory control
    Utilities $  xxx
       xxx
       xxx
       xxx
       xxx
       xxx
       xxx
    $830,000     600 Orders
      8,000 Moves
    100,000 D/L Hours
      1,250 Setups
      6,000 Inspections
     168,000 Components
     90,000 Sq. ft. $xx per order
    $xx.xx per move
    $x.xx per D/L hour
    $xx per setup
    $xx per inspection
    $.xx per component
    $x per sq. ft.

    Assignment of Overhead to Order of 280 Stairs

    Activity Cost Pool Expected
    Use of Driver
    X Activity-Based
    Overhead Rate
    =
    Cost Assigned

    Purchasing
    Handling materials
    Production
    Setting up machines
    Inspecting
    Inventory control
    Utilities     60 Orders
       800 Moves
    5,000 D/L Hours
       100 Setups
       450 Inspections
     16,000 Components
     8,000 Sq. ft. $xx
    $xx.xx
    $x.xx
    $xx
    $xx
    $.xx
    $x $  xxx
      xxx
      xxx
      xxx
      xxx
      xxx
      xxx
    Total overhead assigned $65,950

    Chapter 4 Problem 4-3A (Continued)

    Total manufacturing cost per stair under ABC:

    Direct materials $  xxx
    Direct labor    xxx
    Overhead    xxx
    Total cost of 280 stairs $  281,550

    Total cost per stair $xxx

    Instructions for d
    D. Which of the two costing systems is preferable in pricing decisions and why?

    (d) The difference between the traditional cost and the activity-based cost per unit of $xxx or ($xxx vs. $xxx) is not great in amount but?xx.3%...

    Chapter 4 Problem 4-4A
    Assign overhead costs using traditional costing and ABC; compare results.
    (SO 1, 4)
    Mendocino Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Mendocino also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.

    Tyler Silva, president and founder of Mendocino, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters. Tyler has asked the accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
    CoolDay LiteMist
    Direct materials per liter $0.40 $1.20
    Direct labor cost per liter $0.25 $0.50
    Direct labor hours per liter 0.05 0.09
    Total direct labor hours 120,000 25,000

    Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Product
    CoolDay LiteMist
    Grape cart of $145,860 6,600 6.000 600
    Processing grapes
    Aging Total 396,000 6,600,000 3,000,000 3,600,000
    Months
    Bottling Number of
    and bottles 270,000 900,000 600,000 300,000
    corking
    Labeling Number of
    and boxing bottles 189,000 900,000 600,000 300,000
    Maintain Number of
    and inspections
    inspect
    equipment 240,800 800 350 450
    $1,241,660

    Instructions
    Answer each of the following questions. (Round all calculations to three decimal places.)
    Instructions for a

    A. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
    (a) Cost/liter?C.D. $1.078

    (a) Computation of...

    Overhead cost per labor hour is $1,241,660 ÷ (145,000 + 25,000) = $8.563

    Products

    Manufacturing Costs CoolDay LiteMist

    Direct materials
    Direct labor
    Overhead $x.xx
      .xx
     x.xx*
    $1.078 $x.xx
     x.xx
     x.xx**
    $2.471

    *$8.563 X .05 **8.563 X .09

    Instructions for b

    B. Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).

    (b)
    Activity Cost Pool Estimated
    Overhead Expected Use
    of Cost Drivers Activity-Based
    Overhead Rate

    Grape processing
    Aging
    Bottling and corking
    Labeling and boxing
    Maintenance and
      inspection of equipment   $xxx
       xxx
       xxx
       xxx

       xxx
    $1,241,660     6,600
    6,600,000
     900,000
     900,000

           800 $xx.xx per cart
    $0.xx per month
    $0.xx per bottle
    $0.xx per bottle

    $xxx per inspection

    Instructions for c

    C. Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter.
    (c) Cost/liter?C.D. $.241
    (c) CoolDay LiteMist

    Activity Cost Pool Expected
    Use of
    Drivers

    X
    Overhead
    Rate

    =
    Cost
    Assigned Expected
    Use of
    Drivers

    X
    Overhead
    Rate

    =
    Cost
    Assigned

    Grape processing
    Aging
    Bottling and corking
    Labeling and boxing
    Equipment mainte-
    nance and inspection

    Liters produced

    Overhead cost per
      liter   6,000
    3,000,000
    600,000
    600,000

        350 $xx.xx
    $0.0x
    $0.xx
    $0.xx

    $301 $xxx,600
      xxx,000
    xxx,000
     xxx,000

      xxx,350
    $723,950

     3,000,000

      $0.xx1      600
    x,xxx,000
      xxx,000
      xxx,000

          450 $xx.xx
    $0.0x
    $0.xx
    $0.xx

    $301 $ xx,260
     xxx,000
     xx,000
     xx,000

     xxx,450
    $517,710

     300,000

       $x.xx6

    Instructions for d
    D. Compute the total manufacturing cost per liter for both products under ABC.

    (d) Products

    Manufacturing Costs CoolDay LiteMist

    Direct materials
    Direct labor
    Overhead $x.x00
      .x00
     0.xxx
    $0.891 $x.x0
     x.50
     x.x2x
    $3.426

    Instructions for e:
    E. Write a memo to Tyler Silva discussing the implications of your analysis for the company's plans. In this memo provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.

    (e) To: Mr. Tyler Silva

    From: Student

    Subject: Product costs using traditional approach versus ABC

    The student's memorandum should cover the following points:

    (1) ABC allocates overhead costs...

    (2) Traditional approaches that allocate costs as a function of volume tend to be...

    (3) In the case of the Mendocino Wine Company, the LiteMist product...
    (4) The total cost of the two products

    CoolDay LiteMist

    Traditional approach

    ABC $1.0780

    $0.891 $2.471

    $3.426

    Therefore, the relative profitability of...

    © BrainMass Inc. brainmass.com March 4, 2021, 8:51 pm ad1c9bdddf
    https://brainmass.com/business/financial-accounting-bookkeeping/traditional-costing-and-activity-based-costing-198736

    Attachments

    Solution Preview

    Please see the attached file

    Stellar Stairs Co. of Poway designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Its budgeted manufacturing overhead costs for the year 2006 are as follows.

    Overhead Cost Pools Amount
    Purchasing $ 57,000
    Handling materials 82,000
    Production (cutting, milling, finishing) 210,000
    Setting up machines 85,000
    Inspecting 90,000
    Inventory control (raw materials and finished goods) 126,000
    Utilities 180,000
    Total budget overhead costs $830,000

    For the last 4 years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted. Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Lindsay Baker, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar's request, Lindsay and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
    Activity Cost Pools Cost Drivers Expected Use of Cost Drivers
    Purchasing Number of orders 600
    Handling materials Number of moves 8,000
    Production (cutting, milling, finishing) Direct labor hours 100,000
    Setting up machines Number of setups 1,250
    Inspecting Number of inspections 6,000
    Inventory control (raw materials and finished goods) Number of components 168,000
    Utilities Square feet occupied 90,000

    Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason's request, Lindsay prepares cost estimates for producing components for 280 stairs so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways.
    Direct materials $103,600
    Direct labor $112,000
    Machine hours 14,500
    Direct labor hours 5,000
    Number of purchase orders 60
    Number of material moves 800
    Number of machine setups 100
    Number of inspections 450
    Number of components 16,000
    Number of square feet occupied 8,000

    Instructions for a
    A. Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
    (a) Predetermined...

    $830,000 ÷ 100,000 hrs. = $8.30 per machine hour

    Predetermined overhead is calculated by dividing the estimated overhead by the estimated base which is machine hours here

    Instructions for b
    B. What is the manufacturing cost per stairway under traditional costing?
    (b) Cost/stair $1,199.82

    (b) Manufacturing cost per stair under traditional costing:

    Direct materials $103,600
    Direct labor  112,000
    Overhead (14,500 X $8.30)  120,350
    Total cost of 280 stairs $335,950

    Cost per stair ($xxx ÷ 280)  $1,199.82

    Direct material and direct labor cost is given. Overhead is calculated as predetermined rate X actual machine hours

    Instructions for c
    C. What is the manufacturing cost per stairway under the proposed activity-based costing? (Prepare all of the necessary schedules.)
    (c) Cost/stair $1,005.54
    (c) Manufacturing cost per stair under activity-based ...

    Solution Summary

    The solution explains the calculation of product cost using traditional costing and activity based costing.

    $2.49

    ADVERTISEMENT