Chapter 9, Problem 35E

Activity-Based Costing

After reviewing the new activity-based costing system that Janis McGee has implemented at Joplin Industries’s Port Arthur manufacturing facility, Kris Kristoff, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 100,000 units of J25P and 40,000 units of J40X in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the J25P and the J40X products by 25 percent.

Required

1. a.      Refer to Exhibits 9.13 through 9.16. Compute the amount of overhead allocated to the J25P and the J40X cameras for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter (the text example) except for the number of setup hours. Assume the cost of a setup hour remains at $900.
2. b.      Assume that Joplin had used machine-hours and a department allocation method to allocate its overhead and that the setup-hour rate for the first quarter is $900. Could Kris have made the cost reductions that he planned? What are the advantages and disadvantages of activity-based costing compared to the traditional volume-based allocation methods?