Kim Mills produces three different types of fabric using two departments. In department 1, machines weave the cloth. In department 2, the cloth is dyed a variety of colors. Information for the combined use of resources in both departments for the 3 types of fabric follows.
Bolts are 20 yards each. All fabric is inspected during production. Robotic equipment inspects the fabric for obvious flaws as the bolts are wound up. Each bolt spends about 5 minutes in the inspection process.

Combined overhead costs for the two departments follow:
Cost to operate and maintain machines ... $40,000
Setup costs .............. 11,000
Inspection costs ............ 6,996
Total ................. $57,996

Previously, Kim Mills used a process costing system that allocated direct materials to each product separately, but allocated direct labor and conversion costs as if they were incurred equally across the units produced. Under the process costing system, the overhead cost for department 1 is $19,332 and for department 2 it is $38,664. Direct labor hours and costs in department 1 are 55 hours at $1,100, and the remaining are in department 2. Direct materials for department 1 are $6,000 for denim, $16,000 for lightweight, and $15,000 for heavyweight. The remaining direct materials are added in department 2. No beginning or ending inventory or abnormal spoilage is recorded for Kim Mills this period.

REQUIRED
A. Set up a spreadsheet to perform the following calculations. Use a data input section and cell referencing.
1. Use traditional process costing to allocate the direct materials and conversion costs per department to total bolts produced. Develop a cost per bolt for each type of fabric
2. Using activity-based costing, develop a cost per bolt.
B. Compare the process costing and ABC results. Identify the products with overstated costs and those with understated costs. Explain why the costs are misstated under traditional process costing.
C. How could managers use the ABC information to improveoperations?

Transcribed Image Text:

Lightweight Heavyweight Total Denim Monthly production in units (bolts of fabric) 1,000 bols 4,000 bolts 2,000 bolts 7,000 bolts $8,000 $660 33 hours 500 hours 10 setups 83.3 hours Cotton Cotton Direct materials costs Direct labor costs Direct labor hours Machine hours Number of setups for dye color changes Inspection time $24,000 $1,320 66 hours 1,333.3 hours 30 setups 333.3 hours $20,000 $920 46 hours 1,500 hours 20 setups 166.6 hours $52,000 $2,900 145 hours 3,333.3 hours 60 setups 583.2 hours