Spencer's Sports manufactures outdoor equipment at three regional plants. The Freeway Plant produces two models of fishing reels, the Stream and the Surf. The Surf model is heavier and more durable. Overhead costs are currently allocated using direct labor cost. The plant manager has just returned from a week-long executive course where the instructor discussed product costing and, specifically, activity-based costing (ABC). The plant manager has asked the plant controller about implementing ABC at the plant. The controller has collected the following information on plant overhead for the most recent period: Activity Cost Driver Cost Cost Driver Volume Stream Surf Setting up Number of setups $ 162,000 15 135 Inspecting Number of inspections 121,500 36 45 Packing and shipping Number of packages shipped 76,500 50 200 Total overhead $ 360,000 The controller also collected the following information on production volume and direct costs for each product: Stream Surf Total Units produced 18,000 4,500 22,500 Direct materials cost $ 450,000 $ 337,500 $ 787,500 Direct labor cost 180,000 270,000 450,000 Total direct cost $ 630,000 $ 607,500 $ 1,237,500 Required: Compute the unit cost of each model under the current system. Compute the unit cost of each model under the ABC system suggested by the controller's classification of overhead costs.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

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Spencer's Sports manufactures outdoor equipment at three regional plants. The Freeway Plant produces two models of fishing reels, the Stream and the Surf. The Surf model is heavier and more durable. Overhead costs are currently allocated using direct labor cost. The plant manager has just returned from a week-long executive course where the instructor discussed product costing and, specifically, activity-based costing (ABC). The plant manager has asked the plant controller about implementing ABC at the plant. The controller has collected the following information on plant overhead for the most recent period:

Activity	Cost Driver	Cost	Cost Driver Volume
Stream	Surf
Setting up	Number of setups	$ 162,000	15	135
Inspecting	Number of inspections	121,500	36	45
Packing and shipping	Number of packages shipped	76,500	50	200
Total overhead		$ 360,000

The controller also collected the following information on production volume and direct costs for each product:

	Stream	Surf	Total
Units produced	18,000	4,500	22,500
Direct materials cost	$ 450,000	$ 337,500	$ 787,500
Direct labor cost	180,000	270,000	450,000
Total direct cost	$ 630,000	$ 607,500	$ 1,237,500

Required:

Compute the unit cost of each model under the current system.
Compute the unit cost of each model under the ABC system suggested by the controller's classification of overhead costs.

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