Activity Based Costing Project

Autotech Manufacturing Product Costs

The staff accountant for Sergeant Consulting Group has uncovered the following costs and activities associated with the two products.

Table 1:

Part 127

Part 234

Production

500,000

100,000

Selling Price

$31.86

$24.00

Prime costs per unit

$9.53

$8.26

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

Overhead is allocated using a plant-wide rage based on direct labor hours.

Preliminary analysis of costs by Sergeant Consulting Group revealed that similar costs can be categorized into the following cost pools. Setup costs are costs that occur each time a new production run is made. They involve retooling and reconfiguring the machines and technology. Material handling costs include the equipment and personnel required to transport materials from supplier trucks to the machines. Typically, materials are taken to a storage area before being transported to machines. Each production run will need new materials and materials may also be transported during production runs. Machine costs primarily include depreciation and machine maintenance. Although the machines are depreciated using accelerated depreciation schedules, typically the machine wears out from use and are replaced before they become obsolete.

Receiving costs include the costs of clerical and technical help associated with the processing of each order received from a customer. Engineering costs include the technical support staff that implement design changes in the part, manage processes to maintain quality, and provide technical information on the product. The engineering staffs maintain a record of the amount of time spent on each product. General plant costs include all the other administrative costs not included in the other cost pools.

Table 2:

Overhead Cost Pools

Setup costs

$240,000

Material handling costs

900,000

Machine costs

1,750,000

Receiving costs

2,100,000

Engineering costs

1,500,000

General plant costs

500,000

Total

$6,990,000

ABC Project-Analysis

Part 1: Compute overhead and gross margin using traditional costing

Per Unit

Part 127

Part 234

Overhead/unit

$

$

Gross Margin: Selling Price/unit

$

$

Direct costs/unit

$

$

Overhead/unit

$

$

Gross margin/unit

$

$

Total

Part 127

Part 234

Total Profit

$

$

Part 2: Select the best-cost driver from Table 1 and compute overhead rates for each cost pool.

Cost pool

Cost Driver

Overhead rate

Setup costs

$

Material handling costs

$

Machine costs

$

Receiving costs

$

Engineering costs

$

General plant costs

$

Part 3: Compute overhead cost and gross margin using Activity-based Costing

Per Unit

Part 127

Part 234

Overhead/unit

$

$

Gross Margin: Selling Price/unit

$

$

Direct costs/unit

$

$

Overhead/unit

$

$

Gross margin/unit

$

$

Total

Part 127

Part 234

Total Profit

$

$

Part 4: Recommendations- Increase in price for Product 234 by 25%

Per Unit

Part 127

Part 234

Selling Price/unit

$

$

Direct costs/unit

$

$

Overhead/unit

$

$

Gross margin/unit

$

$

Total

Part 127

Part 234

Total Profit

$

$

Part 5: Another reasonable recommendation to improve profitability. Explain recommendation here:

Per Unit

Part 127

Part 234

Selling Price/unit

$

$

Direct costs/unit

$

$

Overhead/unit

$

$

Gross margin/unit

$

$

Total

Part 127

Part 234

Total Profit

$

$

Part 6: Another reasonable recommendation to improve profitability. Explain recommendation here:

Per Unit

Part 127

Part 234

Selling Price/unit

$

$

Direct costs/unit

$

$

Overhead/unit

$

$

Gross margin/unit

$

$

Total

Part 127

Part 234

Total Profit

$

$

ABC Project-Write-up

You are to assume you are a consultant working for the company. You will want your report to be professional and "ADD VALUE" to the company. Use an executive summary, followed by the detailed report.

Be sure to include the following:

(1)Argue for the use of Activity-based Costing by in this case by:

a)Describing when Activity-based Costing is appropriate and when Traditional Costing is appropriate and when each is not appropriate to use.

b)Discussing what are the strengths and weaknesses of ABC? When is it appropriate to use? What kinds of business situations suggest the need for ABC?

(2)Describe the Activity-based costing system you are recommending. Include a justification for the cost driver selected.

(3)Present your new cost findings. Include both per unit and total cost data. There should be tables with cost information included.

(4)Make strategy recommendations for each product and for the plant. Use the cost and profit numbers to justify these recommendations.

(5)Comment on the validity of the plant manager's concern that competitors are selling below the cost of making Part 127.