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
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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?

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