Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information. The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were: Cost Pools Costs Activity Drivers Receiving $ 600,000 Direct material cost Manufacturing 5,500,000 Machine-hours Machine setup 900,000 Production runs Shipping 1,000,000 Units shipped In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations. Products Standard Deluxe Total direct material costs $ 245,000 $ 155,000 Total direct labor costs $ 650,000 $ 250,000 Total machine-hours 150,000 100,000 Total number of setups 75 125 Total pounds of material 18,000 9,000 Total direct labor-hours 6,000 3,750 Number of units produced and shipped 20,000 5,000 Problem 9-62 (Static) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6) Required: a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used? b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information. The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were: Cost Pools Costs Activity Drivers Receiving $ 600,000 Direct material cost Manufacturing 5,500,000 Machine-hours Machine setup 900,000 Production runs Shipping 1,000,000 Units shipped In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations. Products Standard Deluxe Total direct material costs $ 245,000 $ 155,000 Total direct labor costs $ 650,000 $ 250,000 Total machine-hours 150,000 100,000 Total number of setups 75 125 Total pounds of material 18,000 9,000 Total direct labor-hours 6,000 3,750 Number of units produced and shipped 20,000 5,000 Problem 9-62 (Static) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6) Required: a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used? b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 9-62 (Static) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6)

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?
b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

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Cost Pools		Costs	Activity Drivers
Receiving	$	600,000	Direct material cost
Manufacturing		5,500,000	Machine-hours
Machine setup		900,000	Production runs
Shipping		1,000,000	Units shipped

	Products
	Standard	Deluxe
Total direct material costs	$	245,000	$	155,000
Total direct labor costs	$	650,000	$	250,000
Total machine-hours		150,000		100,000
Total number of setups		75		125
Total pounds of material		18,000		9,000
Total direct labor-hours		6,000		3,750
Number of units produced and shipped		20,000		5,000