Marconi has used only one manufacturing-overhead cost pool to accumulate costs. Overhead

Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff an 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-labor hours. Until recently, Marconi was the sole
producer of Ruff Stuff and was able to dictate the selling price. However, last year marvella Products 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 discontinue the product line. Recognizing that discontinuing the
product line world place an additional 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 required in 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 controller 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
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 assurance 80% 20%
Other utilities 50% 50%
Depreciation 80% 80%

Cost driver Product Line
Tuff Stuff Ruff Stuff
Machine hrs per unit 4.4 6.0
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 the fabricating 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 ecisio regarding the production and pricing of Ruff Stuff will be affected by the
    results of your calculations in the preceding requirements.

 

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