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Computation under current and alternative cost system.

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Huge Company's tooling business unit (TBU) manufactures metal and carbon-fiber parts for the company's major products. TBU's principal focus in recent years has been to schedule its resources properly, but its manager is concerned that the current method of costing the unit's work is causing other business units to send it work that does not use TBU's strengths to the company's overalll advantage. TBU computes a combined labor and overhead cost per labor hour and charges each job based on the number of labor hours used. This labor-based charge is added to materials cost to calculate the total job cost.

TBU works for internal customers exclusively, and there is no consideration to allow it to seek outside work. Other business units are allowed to use external suppliers, however, and are encouraged but not required to use TBU, which has 19 work centers, each of which uses computer-controlled machines and processes.

TBU uses two basic types of machines: (1) 6 multi-axis (M) machines, which allow complex parts to be rotated in multiple directions while being completed without removing the part and (2) 13 single axis (S) machines, which are used for parts that do not have to be rotated more than once to be completed. The M machines were just purchased to replace 6 (S) machines. They are three times as expensive to operate as (S) machines. Each machine is considered a work center and is available 6,000 hours (three shifts) per year.

TBU's employees are highly skilled and are among Huge Company's highest paid hourly workers. They are qualified to work on either type of machine and any type of job. As a practical matter, employees tend to work on machines and jobs that interest them most, but TBU management encourages workers to diversify their efforts. TBU employees are available 2,000 hours per year.
Stainless steel (SS) and aluminum (A) parts are machined from metal stock. Carbon fiber (CF) parts are made by laminating carbon fiber and plastic resins. Carbon-fiber materials are much more expensive and require more labor.
Last year's labor cost and overhead (which includes the costs of management and equipment but excludes materials costs) follow:
Labor (1,000 employees) $ 90,000,000
Equipment (19 work centers) 190,000,000*
Management and engineering 20,000,000
Total $300,000,000

The following are the data for and characteristics of five representative jobs:

Job Equipment Machine Hours Materials Type Weight (kg) Materials Cost Labor Hours
1 M 7.50 SS 300 $ 30,000 22.50
2 S 10.00 CF 200 100,000 160.00
3 M 8.75 A 350 28,000 21.00
4 S 12.50 A 500 40,000 120.00
5 S 5.00 SS 200 20,000 60.00

1. Compute the costs of each job using the current cost system.
2. Recommend an alternative cost system that recognizes additional differences among jobs.
3. Recompute the job costs using your alternative cost system.
4. Explain differences in decision making at TBU.
5. Identify TBU's internal customers that might be influenced by the use of the alternative cost system.

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1. Compute the costs of each job using the current cost system.

We must first compute the combined labor and overhead cost per labor hour. Given that there are 1,000 employees in TBU who each work 2,000 hours a year, the total number of labor hours a year is

1,000 * 2,000 = 2,000,000.

Knowing that the total cost of annual labor and overhead is $300,000,000, we determine that the combined labor and overhead cost per labor hour is

$300,000,000 / 2,000,000 = $150.

To find the total cost of each job under the current costing system, we multiply this figure by the number of labor hours, finally adding the materials cost. Let us do so for each job in order.

1. The 22.50 labor hours incur a cost of

22.50 * $150 = $3,375

Which we add to the materials cost of $30,000 to determine that the total job cost is

$30,000 + $3,375 = $33,375.

2. The 160.00 labor hours account for

160.00 * $150 = $24,000

Leading to a total job cost of

$100,000 + $24,000 = $124,000.

3. The 21.00 labor hours account for

21.00 * $150 = $3,150

Leading to a total job cost of

$28,000 + $3,150 = $31,150.

4. The 120.00 labor hours account for

120.00 * $150 = $18,000

Leading to a total job cost of

$40,000 + $18,000 = $58,000.

5. The 60.00 labor hours account for

60.00 * $150 = $9,000

Leading to a total job cost of

$20,000 + $9,000 = $29,000.

2 Recommend an alternative cost system that recognizes additional differences among jobs.
The flaw in the current costing system is that it does not take into account the difference in operating cost between the multi-axis machines and single-axis machines. Although labor hours can be considered as uniform due to the diversification of worker effort, and the materials cost is fixed for each job, the computed cost of operating the ...

Solution Summary

This posting computes the costs of various jobs using the current cost system and recommends an alternative cost system that recognizes additional differences among jobs. It also recomputes the job costs using the alternative cost system explaining the differences in decision making and finally identifies the internal customers that might be influenced by the use of the alternative cost system.

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