CCN Company produces more than 100 different variations of its basic product and has expended $250,000 in perfecting its newest variation, Zeggo, to the point of starting production. This amount includes the cost of routine design improvement efforts, testing, assembly-line modifications, and training.
Zeggo's production will share an assembly line with several of CCN's other product variations, but only one variation can be produced on the line at one time. Each variation requires a different setup of the machinery on the line. To begin a batch of Zeggo, the machines on the line must first be set up, at a cost of $ 1,000.
Each unit of Zeggo that is produced results in $5 of cost that the CCN cost accounting system traces directly to the product unit, plus another $1 of cost that could be traced, but only with great difficulty. The CCN system classifies the $1 as indirect cost.
CCN's cost accounting system allocates a share of factory overhead to each unit produced; this factory overhead amount includes an allocation of all the manufacturing costs that are not directly traced to the product. Each unit of Zeggo will be allocated $10 of factory overhead.
Required:
(1) Name every cost object for which some amount of cost is identified in the information given and determine the amount of cost for each cost object.
(2) In addition to the cost objects named in your answer to requirement 1, name other items that are mentioned in the case that could serve as cost objects for some purpose. For each one, describe a purpose for which it could serve as the cost object.
(3) Calculate the total cost expected to result from producing the first batch of Zeggo, which will be a batch of 300 units.
(4) CCN plans to produce one more unit of Zeggo. No setup will be required, because the assembly line has just finished a Zeggo production run. Determine the amount of cost that would be expected to result from producing the one additional unit.
(5) Determine the total cost that the CCN cost accounting system will report for the batch of 300 units referred to in requirement 3. (Your answer should be larger than the answer to requirement 3.)
(6) Determine the cost that the CCN cost accounting system will report for the one additional unit referred to in requirement 4. (Your answer should be larger than the answer to requirement 4.)
(7) Explain why the results of requirements 5 and 6 are larger than those of requirements 3 and 4. Specifically: (a) What types of activities have costs that are included in the amounts reported by the cost accounting system but that do not result from producing a batch or a unit of Zeggo? Give examples of these activities, (b) Other than the costs of activities, what kinds of costs account for the difference? Give examples.