Cost-plus and market-based pricing. (CMA, adapted) Precision Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company’s early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Precision are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the budgeted operating costs are collected in a single
Jeff Boone, Precision’s controller, believes that there is enough variation in the test procedures and cost structure to establish separate costing rates and billing rates at a 40% markup. He also believes that the inflexible rate structure the company is currently using is inadequate in today’s competitive environment. After analyzing the company data, he has divided operating costs into the following three cost pools:
Labor and supervision | $ 500,000 |
Setup and facility costs | 300,000 |
Utilities | 360,000 |
Total budgeted costs for the period | $1,160,000 |
Jeff Boone budgets 100,000 total test-hours for the coming period. Test-hours is also the cost driver for labor and supervision. The budgeted quantity of cost driver for setup and facility costs is 600 setup hours. The budgeted quantity of cost driver for utilities is 9,000 machine-hours.
Jeff has estimated that HTT uses 60% of the test-hours, 20% of the setup-hours, and half the machine-hours.
- 1. Find the single rate for operating costs based on test-hours, and the hourly billing rate for HTT and ACT. Required
- 2. Find the three activity-based rates for operating costs.
- 3. What will the billing rate for HTT and ACT be based on the activity-based costing structure? State the rates in terms of test-hours. Referring to both requirements 1 and 2, which rates make more sense for Precision?
- 4. If Precision’s competition all charge $19.50 per hour for arctic testing, what can Precision do to stay competitive?
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to four tons of trash In a load. The landfill operation requires certain preparation activities regardless of the amount of trash in a truck (Le., for each load). The budget for the landfill for next year follows. volume of trash Preparation costs (varies by loads) other variable costs (varies by tons) Fixed costs 1,200 tons (300 loads) $ 54,000 54,000 178,000 $286, 000 Total budgeted costs Mathes is considering making the landfill a profit center and charging the manufacturing plants for disposal of the trash. The landfill has sufficlent capacity to operate for at least the next 20 years. Other landfills are available in the area (both private and municipal), and each plant would be free to declde which landfill to use. Required: a. Compute the optimal transfer…arrow_forwardKagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system:Variable conversion activity rate: $100 per direct labor hourMaterial usage rate: $20 per partABC system:Labor usage: $15 per direct labor hourMaterial usage (direct materials): $20 per partMachining: $75 per machine hourPurchasing activity: $150 per purchase orderSetup activity: $3,000 per setup hourWarranty…arrow_forwardPlease help me with part carrow_forward
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