Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff an Ruff Stuff.

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.

464. Determine the company’s predetermined overhead rate using ldirect-labor cost as the single

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee.
The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If the prices for certain coffees are significantly higher than market, adjustments are made. The company completes primarily on the quality of its products, but customers are price-conscious as well.

Data for the 20×1 budget include manufacturing overhead of $3,000,000, which has been allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20×1 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of raw materials(mostly coffee beans) will total $6,000,000.

The expected prime costs for one-pound bags of two of the company’s products are as follows:

Kona Malaysian
Direct Material $3.20 $4.20
Direct labor .30 .30

WGCC’s controller believes the traditional product-costing system may be providing misleading cost information.
She has developed an analysis of the 20×1 budgeted manufacturing-overhead cost shown in the following chart.
Activity Cost Driver Budgeted Activity Budgeted Cost
Purchasing Purchase orders 1,158 $579,000
Material handling Setups 1,800 720,000
Quality control Batches 720 144,000
Roasting Roasting hours 96,100 961,000
Blending Blending hours 33,600 336,000
Packaging Packaging hours 26,000 260,000
total manufacturing-overhead cost………………………………………………………$3,000,000

Data regarding the 20×1 production of Kona and Malaysian coffee are shown in the following table.
There will be no raw-material inventory for either of these coffees at the beginning of the year.

Kona Malaysian
Budgeted sales 2,000 lb. 100,000 lb.
Batch size 500 lb. 10,000 lb.
Setups 3 per batch 3 per batch
Purchase order size 500 lb. 25,000 lb.
Roasting time 1 hr. per 100lb. 1 hr per 100 lb
Blending time .5 hr per 100 lb .5 hr per 100lb
Packaging time .1 hr per 100 lb .1 hr per 100 lb

  1. Using WGCC’s current product-costing system:
    a. Determine the company’s predetermined overhead rate using ldirect-labor cost as the single cost driver.
    b. Determine the full product costs and selling prices of one pound of Kona coffee and one pound of Malaysian coffee.
  2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and
    one pound of Malaysian coffee.
  3. What are the implications of the activity-based costing system with respect to
    a. The use of direct labor as a basis for applying overhead to products?
    b. The use of the existing product-costing system as the basis for pricing?

 

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