Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM). and organized as a separate division within thecompany. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. BobMiller, the plant controller at UM, has decided to experiment with ABC and has asked you to help develop a simple ABC system thatwould help him decide if it was useful. The controller's staff has identified costs for the first month in the four overhead cost poolsalong with appropriate cost drivers for each pool.Activity DriversDirect material costCosts154, 0001,600, 900900, 000450, 000Cost PoolsIncoming inspectionProductionMachine-hoursMachine setupShippingSetupsUnits shippedThe company manufactures two basic products with model numbers 308 and 510. The following are data for production for the firstmonth as part of MM.Products308510$ 45,000$173,80050,000$ 32,000$283,809118,800Total direct material costsTotal direct labor costsTotal machine-hoursTotal number of setupsTotal pounds of materialTotal direct labor-hours579318,3006,30030,0009,3009,30028,800Number of units produced and shippedRequlred:a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will bereported 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 bythe 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 ofcost pools is used?d. If management should decide to implement an activity-based costing system, what benefits should it expect?

Name: Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc.
Uploaded: 2024-03-20T06:32:49.000Z
Channel: Bartleby
Description: Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM). and organized as a separate division within thecompany. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. BobMil

A) Calculation of predetermined Overhead rate = Total Cost / Machine Hours Total Cost = $154,000 + $1,600,000 +$900,000 +$450,000 = $3,104,000 Total Machine Hours = 50,000 + 110,000 = 160,000 Hours Cost Per unit = $3,104,000 / 16,000 hours = $194 Per Machine Hours Allocation of Cost CALCULATION PARTICULAR 308 510 A Machine hours 50,000 110,000 B Rate $194 $194 C Overhead Cost 9,700,000 21,340,000 D No. of Units 30,000 20,000 E=C X D Cost per unit 323.33 1067 B) Cost driver Rate COST POOL COST ($) COST DRIVER DRIVER RATE Incoming inspection 154,000 Direct Material cost 77,000 (45,000 +32,000) $2 Production 1,600,000 Machine Hour 160,000(50,000 +110,000) $10 Machine Setup 900,000 Setup 150 (57 + 93) $6000 Shipping 450,000 Units Shipped 50,000 (30,000 +20,000) $9 Calculation of Units product Cost CALCULATION PARTICULAR 308 510 TOTAL A Direct Material Cost 45,000 32,000 77,000 B Direct labour Cost 173,000 203,000 376,000 C= 45,000 X $2 =32,000 X $2 incoming Inspection 90,000 64,000 154,000 D= 50,000 X $10 = 110,000 X $10 Production 500,000 1,100,000 1,600,000 E= 57 x $6000 = 93 x $6000 Machine Setups 342,000 558,000 900,000 F=30,000 x $9 = 20,000 x $9 Shipping 270,000 180,000 450,000 G=A+B+C+D+E+F Total 1,420,000 2,137,000 3,557,000 H No, of Units 30,000 20,000 I=G/H Cost Per unit 47.33 106.85 Impact of ABC costing on Management 1. ABC costing helps management to allocate cost more accurately. 2. Management can calculate accurate profit margin. 3. on the basis of cost allocation management can decide whether the product is performing well or not and can make improvement accordingly. 4. ABC Costing helps to set the accurate price of the product.