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Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable
Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders, ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2.145,000 based on production of 30,000 Personal grinders and 10.000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Personal $1,451,400 1,038,000 Commercial $ 702,000 749,500 Total $ 2,153,400 1,787,500 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows: Activity Level Costs Assigned Personali Commercial Total $ 1,035,000 50 25 75 852,000 258,000 15 25 40 150 50 200 Cost Driver Number of production runs Quality tests performed Shipping orders processed. Total overhead $ 2,145,000
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