Chapter 5, Problem 59P

Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and Ruff Stuff. Since inception, Marconi has used only one manufacturing-overhead cost pool to accumulate costs. Overhead has been allocated to products based on direct-labor hours. Until recently, Marconi was the sole producer of Ruff Stuff and was able to dictate the selling price. However, last year Marvella Products began marketing a comparable product at a price below the cost assigned by Marconi. Market share has declined rapidly, and Marconi must now decide whether to meet the competitive price or to discontinue the product line. Recognizing that discontinuing the product line would place an additional burden on its remaining product, Tuff Stuff, management is using activity-based costing to determine if it would show a different cost structure for the two products.

The two major indirect costs for manufacturing the products are power usage and setup costs. Most of the power is used in fabricating the products’ components, while most of the setup costs are required in assembling them. The setup costs are predominantly related to the Tuff Stuff product line.

A decision was made to separate the Manufacturing Department costs into two activity cost pools as follows:

Fabrication: machine hours will be the cost driver.

Assembly: number of setups will be the cost driver.

The controller has gathered the following information.

*Direct-labor hourly rate is the same in both departments.

Required:

1. 1. Assigning overhead based on direct-labor hours, calculate the following:
   1. a.      Total budgeted cost of the Manufacturing Department.
   2. b.      Unit cost of Tuff Stuff and Ruff Stuff.
2. 2. After separation of overhead into activity cost pools, compute the total budgeted cost of each activity: Fabrication and Assembly.
3. 3. Using activity-based costing, calculate the unit costs for each product. (In computing the pool rates for the Fabrication and Assembly activity cost pools, round to the nearest cent. Then, in computing unit product costs, round to the nearest cent.)
4. 4. Discuss how a decision regarding the production and pricing of Ruff Stuff will be affected by the results of your calculations in the preceding requirements.