Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and Ruff Stuff. Since inception, Marconi has used only one manufacturing-overhead cost pool to accumulate costs.
Overhead has been allocated to products based on direct-abor hours. Until recently, Marconi was the sole producer of Ruff Suff and was able to dictate the selling price.
However, last year Marvella Proucts began marketing a comparable product at a price below the cost assigned by Marconi. Market share has declined rapidly, and Marconi must now decide whether to meet the competitive price or to disontinue the product line.
Recognizing that discountinuing the product line wold place an additonal burden on its remaining product, Tuff Stuff, management is using activity-based costing to determine if it would show a different cost structure for the two products.
The two major indirect costs for manufacturing the products are power usage and setup costs. Most of the power is used in fabricating, while most of the setup costs are requiredin assembly. The setup costs are predominately related to Tuff Stuff product line.
A decision was made to separate the Manufacturing Department costs into two activity cost pools as follows:
Fabricating: machines hours will be the cost driver.
Assembly: number of setups will be the cost driver.
The controlller has gathered the following information.
Manufacturing Department
Annual budget before separation of overhead
Product Line
|
Total |
Tuff Stuff |
Ruff Stuff |
|
Number of units |
20,000 |
20,000 |
|
Direct labor hours |
2 hrs per unit |
3 hours per unit |
|
Total direct-labor cost |
800,000 |
|
|
Direct material |
5.00 per unit |
3.00 per unit |
|
Budgeted overhead: |
|
|
Indirect labor |
24,000 |
|
Fringe benefits |
5,000 |
|
Indirect material |
31,000 |
|
Power |
180,000 |
|
Setup |
75,000 |
|
Quality assurance |
10,000 |
|
Other utilities |
10,000 |
|
Depreciation |
15,000 |
Manufacturing Department
Cost Structure after Separation of Overhead into Activity Cost Pools
|
Fabrication Assembly |
Assembly |
|
|
Direct labor cost |
75% |
25% |
|
Direct material (no change) |
100% |
0% |
|
Indirect labor |
75% |
25% |
|
Fringe benefits |
80% |
20% |
|
Indirect material |
20,000 |
11,000 |
|
Power |
160,000 |
20,000 |
|
Setup |
5,000 |
70,000 |
|
Quality utilities |
50% |
50% |
|
Depreciation |
80% |
80% |
|
Cost driver |
Product Line |
|
|
Tuff Stuff |
Ruff Stuff |
|
|
Machine hrs per unit |
4.00 |
6.00 |
|
Setups |
1,000 |
272 |
1. Assigning overhead based on direct-labor hours, calculate the following:
a. Total budgeted cost of the Manufacturing Department.
b. Unit cost of Tuff Stuff and Ruff Stuff.
2. After separation of overhead into activity cost pools, compute the total budgeted cost of each department: fabricating and assembly.
3. Using activity-based costing, calculate the unit costs for each product. ( In computing the pool rates for th efabricating and assembly activity cost pools, round to the nearest cent. Then, in computing unit product cost, round to the nearest cent).
4. Discuss how a decision regarding theproduction and pricing of Ruff Stuff will be affected by the results of your calculations in the preceding requirements.