$1$

Case problem:

The Redwood plant makes two types of rotators for automobile engines: R$361$ and R$572.$ The old cost system at the plant traced

support costs to four cost pools:

Cost Pool Support Costs Cost Driver

S$1$ $$1,176,000$ Direct labor cost

S$21,120,000$ Machine hours

P$1480,000-$

P$2780,000-$

Total $$3,556,000$

Pool S$1$ included service activity costs related to setups, production scheduling, plant administration, janitorial services, materials

handling, and shipping. Pool S$2$ included activity costs related to machine maintenance and repair, rent, insurance, power and utilities.

Pools P$1$ and P$2$ included supervisor's wages, idle time, and indirect materials for the two production departments, i$.$e$.$ casting and

machining, respectively.

The old accounting system allocated support costs in pools S$1$ and S$2$ to the two production departments using direct labor cost and

machine hours, respectively, as the cost drivers. Then the accumulated support costs in pools P$1$ and P$2$ were applied to the two

products on the basis of direct labor hours. A separate rate was determined for each of the two production departments, i$.$e$.$ the direct

labor wage rate of $$15$ per hour in casting and $$18$ per hour in machining.

Direct Labor Hours $($DLH$)$

Department R$361$ R$571$ Total Direct Labor Costs

Casting $($P$1)60,00020,00080,000$ $$1,200,000$

Machining $($P$2)72,00048,000120,0002,160,000$

Totals $132,00068,000200,000$ $$3,360,000$

Machine Hours $($MH$)$

Department R$361$ R$571$ Total

Casting $($P$1)30,00010,00040,000$

Machining $($P$2)72,00048,000120,000$

Totals $102,00058,000160,000$

Item R$361$ R$571$

Sales price per unit $$19$ $$20$

Sales and production units $500,000400,000$

Number of orders $1,0001,000$

Number of setups $2,0004,000$

Materials cost per unit $$8$ $$10$

Now the plant has implemented an activity$-$based costing system. The following table presents the amounts from the old cost pools

that are traced to each of the new activity cost pools:

Old Cost Pools

Activity Cost Drivers S$1$ S$2$ P$1$ P$2$ Total

P$1$ DLH $$120,0000$ $$120,0000$ $$240,000$

P$2$ DLH $240,00000120,000360,000$

Setup Hours $816,00080,000240,000540,0001,676,000$

P$1$ MH $0260,000120,0000380,000$

P$2$ MH $0780,0000120,000900,000$

Total $$1,176,000$ $$1,120,000$ $$480,000$ $$780,000$ $$3,556,000$

Setups for R$572$ are $50\%$ more complex than those for R$361,$ i$.$e$.$ each R$572$ setup takes $1\mathrm{.}5$ times that of R$361$ setup

$1.$ Old costing system. Fill in the spaces in the tables below.

Stage $1$: Allocation of S$1$ and S$2$ costs to production departments

Department P$1$ Department P$2$

Directly traceable $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

S$1($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

S$2($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Total support $($$$)$ $$1,180,000$ $$2,376,000$

DLH $($hours$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Cost driver rate $($$ per DLH$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Stage $2$: Allocation of P$1$ and P$2$ costs to products

Product R$361$ Product R$572$

P$1($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

P$2($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$$2,310,600$ $$1,245,400$

$2$

Product costing:

Product R$361$ Product R$572$

Direct materials $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Direct labor: P$1($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Direct labor: P$2($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Support $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Total cost $($$$)$ $$8,506,600$ $$6,409,400$

Total units $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Unit cost $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Sales price $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Gross margin $($$$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Gross margin $\%\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$2.$ Activity Based costing system. Fill in the spaces in the tables below.

Activity Cost Drivers Product R$361($hrs$)$ Product R$572($hrs$)$ Traceable Costs $($$$)$ Activity Cost Driver

Rates

P$1-$DLH $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

P$2-$DLH $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Setup hours $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

P$1-$MH $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

P$2-$MH $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Total Support Costs

Activity Cost Drivers Product R$361$ Product R$572$

P$1-$DLH