Reference no: EM13876869

ABC versus Traditional Approaches to Control of Batch-Related Overhead Costs The Bangor Manufacturing Company makes mechanical toy robots that are typically produced in batches of 250 units. Prior to the current year, the company's accountants used a standard cost system with a simplified method of assigning manufacturing support (i.e., overhead) costs to products: all such costs were allocated to outputs based on the standard machine hours allowed for output produced. You have recently joined the accounting team and are developing a proposal that the company adopt an ABC system for both product-costing and control purposes. To illustrate the benefit of such a system in terms of the latter, you decide to put together an analysis of batch-related overhead costs. You chose these costs because a previous investigation indicated that there is both a variable com- ponent to these costs (materials plus power) plus a fixed component (depreciation and salaries). Last year's budget indicated that the variable overhead cost per setup hour was $20 and that the fixed overhead production setup costs per year were $20,000. Output was budgeted at 10,000 units for the year. Typically a batch takes four hours of setup time. For cost-control purposes, assume that the flexible budget is based on the budgeted number of setup hours for the output of the period.

You have also collected data regarding actual results for the past year. Specifically, the com- pany produced (and sold) 9,000 toy robots, which were produced in an average batch size of 200 units. The actual setup hours per batch last year turned out to be 4.25 hours and the actual variable overhead cost per setup hour was $19. Actual fixed setup-related overhead costs were
$21,000 last year.

Your discussion with the company controller indicates that under the previous accounting system, all setup-related overhead costs were allocated to production based on machine hours. The standard machine hours allowed per unit produced was 1.50 hours. The denominator activity level assumed for applying fixed manufacturing support costs to units produced was 15,000 machine hours.

Required:

1. Under the ABC approach, what was the (a) spending variance, and (b) production-volume variance last year for the fixed setup-related overhead costs described above? How would you explain these results to management?

2. Under the ABC approach, what was the (a) spending variance, and (b) efficiency variance last year for the variable setup-related overhead costs described above? How would you explain these results to management?

3. Write a brief statement outlining the projected costs and benefits of using an ABC approach for the day- to-day control of the overhead costs referred to above as compared to the use of a more traditional cost system.

4. The Bangor Manufacturing Company is currently experiencing severe cost-based pressure from foreign competitors. As such, top management of the company is interested in improving the existing financial- control system in the organization. What other recommendation might you have for management in this regard? That is, what do you recommend to accompany the type of financial analysis referred to above?