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After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that
After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 104,000 units of the Sport model and 42,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 29 percent. Cost Drivers and Cost Driver Volumes-CenterPoint Manufacturing Facility Activity Assembly building Assembling Cost Driver Sport Cost Driver Volume Pro Total Machine-hours 6,400 Setting up machines Handling material Packaging building Setup hours. Production runs 44 12 30,400 440 441 36,800 484 56 Inspecting and packing Shipping Direct labor-hours Number of shipments 61,600 104 23,600 208 85,200 312 Third Quarter Unit Cost Report, Activity-Based Costing-CenterPoint Manufacturing Facility Direct material Direct labor Assembly Packaging Overhead. Assembly building Sport $1,504,000 $ 754,000 994,000 $1,748,000 $3,252,000 $ 192,000 39,600 Total direct labor Direct costs Assembling (@ $30 per MH) Setting up machine (@ $900 per setup hour) Handling material (@ $3,000 per run) Packaging building. Inspecting and packing (@ $5 per direct labor-hour) Shipping (@ $1,320 per shipment) Total ABC overhead Total ABC cost $ 712,880 $3,964,880 Number of units Unit cost 36,000 308,000 Pro $2,408,000 $ 608,000 368,000 $-976,000 $3,384,000 $ 912,000 396,000 132,000 118,000 137,280 274,560 $1,832,560 $5,216,560 104,000 42,000 $ 38.12 $ 124.20
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