Based on the information presented below, you are required to:a) Briefly explain the difference between production departments and service departments. Specify for the manufacturing plant in Amazon City which departments are production departments, and which are service ones. b) List the reasons that the old cost accounting system at Petersen Pneumatic Company may be distorting its product costs.c) Determine the product costs per unit using the old cost accounting system. Show as clearly as possible all the intermediate steps for allocations, including departmental cost driver (allocation base) rates and a breakdown of product costs into each of their components.d) Determine the product costs per unit using the new cost accounting system. Show as clearly as possible all the intermediate steps, including the cost driver rates, amounts in the five new cost pools, as well as a breakdown of product costs into each of their components

PROBLEM 1 (Weight 2/3) Petersen Pneumatic Company produces three products, nicknamed as Tiger, Panther, and Jaguar. Its manufacturing plant in Amazon City has three production departments and three service departments. DEPARTMENT SUPPORT COSTS Machining (MC) $ 40,000 Plating (PL) $ 50,000 Assembly (AS) $15,000 Purchasing and inventory (PI) $ 50,DO0 Setup and scheduling (SS) $ 120,000 Quality control (OC) $ 70,000 Support costs are first traced to the six departments. The old cost accounting system allocated the service department costs to the production departments using the following cost drivers: DEPARTMENT COST DRIVER Purchasing and inventory (PI) Material costs (MAT) Setup and scheduling (SS) Direct labor hours (DLH) Quality control (QC) Machine hours (MCH) The old cost accounting system applied support costs to the three products on the basis of direct labor hours. A different cost driver rate was determined for each department. The direct labor wage rate at the plant is $ 10 per hour. DEPARTMENT Direct Labor Hours (DLH) Machine hours Tiger Panther Jaguar (MCH) Machining (MC) 7,000 2,800 2.200 5.200 Plating (PL) 3,500 1,700 1.800 1.900 Assembly (AS) 2,500 1,0DO 1,000 2.900 PRODUCT Product Sales Batch-related Drivers |Material costs per unit Price Sales Units Orders Setups MC PL Tiger $1.25 500,000 25 110 $0.30 $0.10 Panther $1.20 200,000 10 43 $0.25 $0.10 Jaguar $1.30 200,000 40 166 $0.28 $0.10 The profitability of the Amazon City's plant has been declining significantly for the past three years despite the successful launch of the new product - Jaguar - which has now captured more than a 60% share of its segment of the industry. In an assiduous endeavor to understand the reasons for its deteriorating profitability, the company has appointed a special task force. IS V University of Page 4 of 6 South-zystern Norway School of business The task force is considering a new cost accounting system based on activity analysis. This system employs five cost drivers: three departmental DLH, setups (SET), and orders (ORD). Each departmental cost pool is divided into homogenous cost pools identified with a unique driver. The following table presents the percent of the departmental support costs that are put in each of the homogenous cost pools. The total amounts in the five cost pools are allocated to the three products based on their respective cost drivers. DEPARTMENT DLH SET ORD Machining (MC) 30% 70% 0% Plating (PL) 70% 30% 0% Assembly (AS) 60% 40% 0% Purchasing and inventory (PI) 0% 40% 50% Setup and scheduling (SS) ? Quality control (QC) 0% 70% 30% Peter Gamble is the leader of the task force responsible for activity-based cost analysis. He interviewed Nola Morris, who was responsible for the setup and scheduling department, to determine the cost drivers for the departmental support costs. An excerpt from that interview is as follows: Gamble: "How many people work in the setup and scheduling department?" Morris: "I have twelve people who work on setups. Three more are responsible for production scheduling. I spend most of my time supervising them", Gamble: "How do you assign setup workers to production jobs?" Morris: "Almost all the time they set up machines in the machining department. The effort depends only on the number of setups". Gamble: "On what does the time spent on scheduling depends?" Morris: "It depends on the number of orders". Gamble: "So a large batch or order will require the same amount of setup and scheduling time as a small batch or order" Morris: "Yes, that is absolutely right"