Activity 4: Activity Based Costing at J&B Sports

The new internal accountant at J&B Sports is concerned about the current method of allocating overhead to production, using a volume-based allocation base (direct labour cost) and one plant-wide overhead rate. She decided to undertake an activity analysis across the manufacturing processes of the company and to identify the relevant cost drivers of these. She determined that J&B Sports had the following four activity pools and associated activity drivers:

Activity Pool Activity Driver Product design Number of product lines Warehousing/Packaging Number of batches Cutting Number of cuts Sewing Direct labour hours

Once the activity pools were established, manufacturing overhead costs are assigned to these: Product Design

Warehousing/ Packaging

Cutting Sewing

Indirect labour $40,000 $40,000 $7,500 $15,000 Depreciation 7,396 34,696 Indirect materials 37,512 110,869 135,861 101,064 Rent Utilities 41,330 Insurance Other 6,377 12,297 3,747 14,730 Total $83,889 $170,562 $147,108 $206,820

Data was also collected on the activity drivers for each activity pool: Activity Pool Total Activity Product design 3 product lines (jerseys, shorts, jackets) Warehousing/Packaging 9,170 batches Cutting 56,580 cuts Sewing 86,175 direct labour hours

ACCT6004_Assessment 2 Brief_Individual Case Study

Page 10 of 10

Chris Desmond, J&B Sports' operations manager, recently received a sales brochure for a new electric cutting tool. Based on the tool's specifications, Chris believes that J&B Sports could increase the batch size on jersey production to 50 jerseys, up from the current 35 jerseys. While the cutting tool would be used on shorts and jackets as well, other production factors prevent increasing the batch sizes for these products. The new tool would increase annual operating costs by $14,082. Before deciding whether to purchase the cutting tool, Chris wants to know how the new tool will affect the cost of producing the company's three main products. Required a. Calculate the activity rates for each of the four activity pools before the new tool was purchased. b. Classify each activity using the ABC cost hierarchy categories. c. Calculate and present a schedule of the total annual cost included in the cutting activity cost pool assuming the cutting tool is purchased. d. Calculate the cost per cut assuming the cutting tool is purchased. e. Identify any other activity rates that will be affected by the purchase of the new cutting tool and explain how they will be affected. f. Explain to Chris why unit costs for all three products will change after the purchase of the new cutting tool. g. Do you recommend that Chris purchase the new cutting tool? Write a memo in the proper format which justifies your recommendation by providing relevant and appropriate supporting information. Include and explain any qualitative factors which may affect your recommendation.