Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four overhead cost pools along with appropriate cost drivers for each pool. Cost Pools Costs Activity Drivers Incoming inspection $
Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system that would help him decide if it was useful. The controller’s staff has identified costs for the first month in the four
| Cost Pools | Costs | Activity Drivers | |||
| Incoming inspection | $ | 178,000 | Direct material cost | ||
| Production | 1,260,000 | Machine-hours | |||
| Machine setup | 1,001,000 | Setups | |||
| Shipping | 270,000 | Units shipped | |||
The company manufactures two basic products with model numbers 308 and 510. The following are data for production for the first month as part of MM.
| Products | ||||||
| 308 | 510 | |||||
| Total direct material costs | $ | 56,000 | $ | 33,000 | ||
| Total direct labor costs | $ | 174,000 | $ | 204,000 | ||
| Total machine-hours | 68,000 | 112,000 | ||||
| Total number of setups | 60 | 94 | ||||
| Total pounds of material | 18,400 | 9,400 | ||||
| Total direct labor-hours | 6,400 | 9,400 | ||||
| Number of units produced and shipped | 20,000 | 10,000 | ||||
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. A consulting firm has recommended using an activity-based costing system, with the activities based on the cost pools identified by the cost accountant. What are the cost driver rates for the four cost pools identified by the cost accountant?
c. What unit product costs will be reported for the two products if the ABC system suggested by the cost accountant’s classification of cost pools is used?
d. If management should decide to implement an activity-based costing system, what benefits should it expect?
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