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Product-Costing Accuracy, Corporate Strategy, ABC Autotech Manufacturing Is engaged in the production of replacement parts for automobiles. One plant specializes in the production of two parts: Part #127 and Part $234. Part #127 produced the highest volume of activity, and for many years It was the only part produced by the plant. Five years ago, Part #234 was added. Part $234 was more difficult to manufacture and required special tooling and setups. Profits increased for the first three years after the addition of the new product. In the last two years, however, the plant faced intense competition, and its sales of Part # 127 dropped. In fact, the plant showed a small loss in the most recent reporting period. Much of the competition was from foreign sources, and the plant manager was convinced that the foreign producers were guilty of selling the part below the cost of producing it. The following conversation between Patty Goodson, plant manager, and Joseph Fielding, divisional marketing manager, reflects the concerns of the division about the future of the plant and its products. this budgetary environment, we can't afford to carry plants that don't show a profit. We shut one down just last month because it JOSEPH: You know, Patty, the divisional manager is real concerned about the plant's trend. He indicated that couldn't handle the competition, PATTY: Joe, you and I both know that Part #127 has a reputation for quality and value. It has been a mainstay for years. I don't understand what's happening JOSEPH: I just received a call from one of our major customers concerning Part #127. He said that a sales representative from another firm offered the part at $20 per unit-$11 less than what we charge. It's hard to compete with a price like that. Perhaps the plant is simply obsolete. cheaply. I'm not convinced that PATTY: No. I don't buy that. From my sources, I know we have good technology. We are efficient. And it's costing a little more than $21 to produce that part. I don't see how these companies can afford to sell it we should meet the price. Perhaps a better strategy is to emphasize producing and selling more of Part 7234. Our margin is high on this product, and we have virtually no competition for it. JOSEPH: You may be right. I think we can increase the price significantly and not lose business. I called a few customers to see how they would react to a 25 percent increase in price, and they all said that they would still purchase the same quantity as before. PATTY: It sounds promising. However, before we make a major commitment to Part #234, I think we had better explore other possible explanations. I want to know how our production costs compare to those of our competitors. Perhaps we could be more efficient and find a way to earn our normal return on Part #127. The market is so much bigger for this part. I'm not sure we can survive with only Part #234. Besides, my production people hate that part. It's very difficult to produce. After her meeting with Joseph, Patty requested an investigation of the production costs and comparative efficiency. She received approval to hire a consulting group to make an independent Investigation. After a three-month assessment, the consulting group provided the following information on the plant's production activities and costs associated with the two products: Part #127 Part #234 Production 500,000 100,000 Selling price $31.86 $24.00 Overhead per unit $12.83 $5.77 $ Prime cost per unit $8.53 $6.26 Number of production runs 100 200 Receiving orders 400 1,000 Machine hours 125,000 60,000 Direct labor hours 250,000 22,500 Engineering hours 5,000 5,000 Material moves 500 400 Calculated using a plantwide rate based on direct labor hours. This is the current way of assigning the plant's overhead to its products. The consulting group recommended switching the overhead assignment to an activity-based approach. It maintained that activity-based cost assignment is more accurate and will provide better information for decision making. To facilitate this recommendation, It grouped the plant's activities into homogeneous sets with the following costs: Overhead: Setup costs $ 240,000 Machine costs 1,750,000 Receiving costs 2,100,000 Engineering costs 2,000,000 Materials-handling costs 900,000 Total $6,990,000 Required: 1. Verify the overhead cost per unit reported by the consulting group using direct labor hours to assign overhead. Round your interim calculations and answers to the nearest cent. Overhead rate per direct labor hour Part 127 s per unit Part 234 sl per unit Compute the per-unit gross margin for each product. Round your answers to the nearest cent. Part #127 per unit Part #234 per unit 2. After learning of activity-based costing, Patty asked the controller to compute the product cost using this approach. Recompute the unit cost of each product using activity-based costing. Round your interim calculations and answers to the nearest cent. Part 7127 per unit Part 234 per unit Compute the per-unit gross margin for each product. Round your answers to the nearest cent. If an answer is a loss, use a minus (-) sign to indicate. Part #127 per unit Part 234 per unit 3. Should the company switch its emphasis from the high-volume product to the low-volume product? Assigning Resource Costs to Activities, Resource Drivers, Primary and Secondary Activities Bob Russo, cost accounting manager for Hemple Products, was asked to determine the costs of the activities performed within the company's Manufacturing Engineering Department. The department has the following activities: creating bills of materials (BOMS), studying manufacturing capabilities, Improving manufacturing processes, training employees, and designing tools. The general ledger accounts reveal the following expenditures for Manufacturing Engineering: Salaries $500,000 Equipment 100,000 Supplies 30,000 Total $630,000 The equipment is used for two activities: Improving processes and designing tools. The equipment's time is divided by two activities: 40 percent for Improving processes and 50 percent for designing tools. The salaries are for nine engineers, one who earns $100,000 and eight who earn $50,000 each. The $100,000 engineer spends 40 percent of her time training employees in new processes and 60 percent of her time on improving processes. One engineer spends 100 percent of her time on designing tools, and another engineer spends 100 percent of his time on improving processes. The remaining six engineers spend equal time on all activities. Supplies are consumed in the following proportions: Creating BOMS 10% Studying capabilities 5 Improving processes 35 Training employees 20 Designing tools 30 After determining the costs of the engineering activities, Bob was then asked to describe how these costs would be assigned to jobs produced within the factory. (The company manufactures machine parts on a job-order basis.) Bob responded by Indicating that creating BOMs and designing tools were the only primary activities. The remaining were secondary activities. After some analysis, Bob concluded that studying manufacturing capabilities was an activity that enabled the other four activities to be realized. He also noted that all of the employees being trained are manufacturing workers-employees who work directly on the products. The major manufacturing activities are cutting, drilling, lathing, welding, and assembly. The costs of these activities are assigned to the various products using hours of usage (grinding hours, drilling hours, etc.). Furthermore, tools were designed to enable the production of specific jobs. Finally, the process Improvement activity focused only on the five major manufacturing activities. Required: Using the resource drivers and direct tracing, calculate the costs of each manufacturing engineering activity. If required, round your answers to the nearest dollar. Activity Cost Creating BOMS Studying capabilities Improving processes Training employees Designing tools Job Costs Using a Plantwide Overhead Rate Perrin Company designs Industrial prototypes for outside companies. Budgeted overhead for the year was $315,000, and budgeted direct labor hours were 18,000. The average wage rate for direct labor is expected to be $35 per hour. During June, Perrin Company worked on four jobs. Data relating to these four jobs follow: Job 39 Job 40 Job 41 Job 42 Beginning balance $22,400 $35,600 $19,100 $1,500 Materials requisitioned 18,100 22,000 13,300 14,100 Direct labor cost 9,200 19,100 7,950 5,000 Overhead is assigned as a percentage of direct labor cost. During June, Jobs 39 and 40 were completed; Job 39 was sold at 115 percent of cost. Job 40 is the only job in Finished Goods Inventory and will remain there until the customer accepts delivery and pays. Jobs 41 and 42 remain unfinished at the end of the month. Required: 1. Calculate the overhead rate based on direct labor cost. % of direct labor cost 2. Set up a simple job-order cost sheet for all jobs in process during June. Perrin Company Job-Order Cost Sheets Job 39 Job 40 Job 41 Job 42 Balance: June 1 2683 Total 3. What if the expected direct labor rate at the beginning of the year was $28 instead of $35? What would the overhead rate be? If required, round your overhead rate answer to one decimal place. New budgeted direct labor cost = $ New overhead rate % of direct labor cost How would the cost of the jobs be affected? Job Costs Using a Plantwide Overhead Rate Perrin Company designs Industrial prototypes for outside companies. Budgeted overhead for the year was $455,000, and budgeted direct labor hours were 26,000. The average wage rate for direct labor is expected to be $35 per hour. During June, Perrin Company worked on four jobs. Data relating to these four jobs follow: Job 39 Job 40 Job 41 Job 42 $25,600 $35,500 $19,800 $1,500 Beginning balance Materials requisitioned 17,500 23,000 12,100 12,600 Direct labor cost 8,600 20,100 6,750 3,500 Overhead is assigned as a percentage of direct labor cost. During June, Jobs 39 and 40 were completed; Job 39 was sold at 120 percent of cost. Job 40 is the only job in Finished Goods Inventory and will remain there until the customer accepts delivery and pays. Jobs 41 and 42 remain unfinished at the end of the month. Required: 1. Calculate the balance in Work in Process as of June 30. 2. Calculate the balance in Finished Goods as of June 30. 3. Calculate the cost of goods sold for June. 4. Calculate the price charged for Job 39. Round your answer to two decimal places. 5. What if the customer for Job 40 was able to pay for the job by June 30? What would happen to the balance in Finished Goods? What would happen to the balance of Cost of Goods Sold? Finished Goods would increase por Job 39. Round your answer to two decimal places. Finished Goods would decrease Finished Goods would not change 40 was able to pay for the job by June 30? What would happen to the balance in Finished Goods? Cost of Goods Sold would increase was able to pay for the ju Cost of Goods Sold would decrease Cost of Goods Sold would not change br Cost of Goods Sold