Reference no: EM132561541
Churchill Products is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. The company's cost accountant has identified three overhead cost pools along with appropriate cost drivers for each pool.
Cost Pools Costs Activity Drivers
Utilities $335,000 67,000 machine-hours
Scheduling and setup 290,000 580 setups
Material handling 775,000 1,550,000 pounds of material
The company manufactures three models of water basins (Oval, Round, and Square). The plans for production for the next year and the budgeted direct costs and activity by product line are as follows.
Products Oval Round Square
Total direct costs (material and labor) $80,000 $90,000 $80,000
Total machine-hours 35,000 12,000 20,000
Total number of setups 80 300 200
Total pounds of material 460,000 310,000 780,000
Total direct labor-hours 3,500 1,000 5,500
Number of units produced 3,800 2,200 6,000
Required:
Question a. The current cost accounting system charges overhead to products based on direct labor-hours. What unit product costs will be reported for the three products if the current cost system continues to be used?
Question b. What are the cost driver rates for the three cost pools identified by the cost accountant?
Question c. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant's classification of cost pools is used?
Question d. If management should decide to implement an activity-based costing system, what benefits should it expect?
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