Reference no: EM132515573

Calculating Costs

• Serenity Now Industries manufactures custom fiberglass hulls for luxury yachts and pleasure boats. The current cost accounting system uses machine hours to allocate manufacturing overhead to each job. Serenity estimates that in the coming year it will incur $600,000 in manufacturing overhead costs and use 8,000 machine hours.

• Depending on the specifications requested by the customer, the hull may use hazardous chemicals that incur greater disposal costs. Serenity's traditional accounting system includes the cost of hazardous waste disposal in with total manufacturing overhead. Serenity is planning to implement an activity-based costing system to more accurately assign hazardous waste disposal costs to each job.

Expected usage and costs for manufacturing overhead are as follows:

Cost Pool Description                   Cost Pool                   Cost Drive                Cost Driver Usage                   Cost Pool Rate

Machine Maintenance Costs          200,000               # of Machine Hrs                    8,000                             $25.00

Engineering Change Orders               100,000                  # of Change Orders           1,250                             $80.00

Hazardous Waste Disposal                300,000                      Gallons HW Generated          800                          $375.00

                                                   $600,000

During the year, Yacht #633 was started and completed:

DM cost per lb.                               $55

Lbs. of DM used on job                     170

DL cost per hr.                              $20.00

DLH used                                         50

Requirements:

Question a. Solve the cost of Yacht #633 using the Serenity's current method of allocating manufacturing overhead.

Question b. Solve the cost of Yacht #633 using the proposed activity-based costing system. How is this information useful to an environmental management accounting (EMA) system?