Reference no: EM131589403

Problem One - PLANT-WIDE RATE AND ACTIVITY-BASED COSTING

The comptroller for Douglas Inc. has established the following activity cost pools and cost drivers.

Activity Cost Pool Cost	Budgeted Overhead Cost Driver	Budgeted Level for Cost Driver
Machine setups	$200,000	Number of setups - 160
Materials handling	100,000	Weighted of material - 50,000 kilograms
Waste control	50,000	Weighted of chemicals - 10,000 kilograms
Quality control	75,000	Number of inspection - 300
Other overhead costs	200,000	Machine hours - 20,000

Each order must be a minimum of 1,000 boxes of film chemicals.

The production requirements for each minimum order are as follows:

Machine setups - 5 setups

Material handling - 1,500 kilograms

Waste Control - 200 kilograms

Quality Control - 5 inspections

Other Overhead Costs - 500 machine hours

Required:

1. Calculate the overhead that should be assigned to each minimum order of film chemicals using the above data.

2. Calculate the overhead that should be assigned to each minimum order of film chemicals if Douglas decides to use a single predetermined overhead rate based on machine hours.

Problem Two - PLANT-WIDE RATE AND ACTIVITY-BASED COSTING

Hood Manufacturing Inc. has four categories of overhead. The expected overhead costs for each of the categories for the next year are as follows:

	Cost	Cost Driver	Expected Activity
Maintenance	$510,000	Machine hours	60,000
Materials handling	250,000	Materials moves	20,000
Setups	60,000	Setups	3,000
Inspection	21,000	Inspection	12,000

Currently, the company applies overhead using a predetermined overhead rate based upon budgeted direct labour hours of 100,000.

The company has been asked to submit a bid on a proposed job. Usuallybids are based upon full manufacturing costs plus a percentage of 10 percent.

Estimates for the proposed job are as follows:

Direct materials - $30,000

Direct labour - $24,000

Number of direct labour hours - 8,000

Number of material moves - 100

Number of inspections - 120

Number of setups - 24

Number of machine hours - 4,000

Required:

1. If the company used activity-based cost drivers to assign overhead, calculate the bid price of the proposed job.

2. If the company used direct labour hours as the cost driver, calculate the bid price of the proposed job.

Problem Three - NON-VALUE-ADDED COSTS, ACTIVITY COSTS, ACTIVITY COST REDUCTION

BobDaly, vice president of Dwan Company (a producer of a variety of plastic products), has been supervising the implementation of an ABC management system. One ofBob's objectives is to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, Bob has decided to focus on two processes: production and customer service.

Within each process, one activity will be selected for improvement: materials usage for production and sustaining engineering for customer service (sustaining engineers are responsible for redesigning products based on customer needs and feedback). Value- added standards are identified for each activity (the level of efficiency so that no waste exists). For materials usage, the value-added standard calls for six kilograms per unit of output (although the plastic products differ in shape and function, their size-as measured by weight-is uniform). The value-added standard is based on the elimination of all waste due to defective moulds. The standard price of materials is $5 per kilogram.

For sustaining engineering, the standard is 58 percent of current practical activity capacity. This standard is based on the fact that about 42 percent of the complaints have to do with design features that could have been avoided or anticipated by the company.

Current practical capacity (at the end of 2013) is defined by the following requirements: 6,000 engineering hours for each product group that has been on the market or in development for five years or less and 2,400 hours per product group of more than five years. Four product groups have less than five years' experience, and 10 product groups have more. Each of the 24 engineers is paid a salary of $60,000. Each engineer can provide 2,000 hours of service per year. No other significant costs are incurred for the engineering activity.

Actual materials usage for 2014 was 25 percent above the level called for by the Value-added standard; engineering usage was 46,000 hours. A total of 80,000 units of output were produced. Bob and the operational managers have selected some improvement measures that promise to reduce non-value-added activity usage by 40 percent in 2015. Selected actual results achieved for 2015 are as follows:

Units produced - 80,000

Materials used - 584,800

Engineering hours - 35,400

The actual prices paid for materials and engineering hours are identical to the standard or budgeted prices.

Required:

1. For 2014, calculate the non-value-added usage and costs for materials usage and sustaining engineering.

2. Using the budgeted improvements, calculate the expected activity usage levels for 2015. Now, calculate the 2015 usage variances (the difference between the expected and actual values), expressed in both physical and financial measures, for materials and engineering. Comment on the company's ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any realized reductions in resource usage.