Beaver Co. is a publicly traded corporation that produces different types of air fryers. My name is Alan Smith and I have worked for this company for the last ten years in the controller's office. I was both an accounting and finance major in university. The company currently produces 300 products and does not anticipate any new products coming out over the next three years. I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional costing system (where overhead costs are allocated across products at a rate of $30 per direct labor hour) when different products require different amounts of indirect overhead resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor hours. Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor hours. Given that traditional costing systems may result in significant cost distortions when determining products costs and given that the firm now has revenues of over $100 million a year, Beaver has decided to adopt activity based costing over the next year or two.

Beaver's management has hired Deloitte Consulting to help us implement activity based costing. I will be acting as the liaison between our firm and Deloitte. As part of the initial implementation phase, I have asked Deloitte to derive the costs and product margins associated with two of our products, Classic and Artisan, so that these costs and product margins could be compared with the costs and profit margins under our current traditional costing system. I picked these products since Beaver management believe they have very different demands on indirect overhead resources. Further, Classic is sold in large quantities whereas Artisan is sold in small quantities.

Current information from our existing system on a per unit basis is shown in Exhibit 1.

Exhibit 1 lClassic Artisan Direct material $20 $40 Direct labor hours 1.5 2 Direct labor wage rate per hour $15 $15 Sales price per unit $100 $150 My staff has identified for Deloitte five activity cost pools. information on those cost pools and the related activity measures are provided in Exhibit 2. Exhibit 2 Total lCosts Allocation Base Level of Allocation Base Equipment setups $4,000,000 number of setups 50,000 Purchase orders $2,000,000 number of purchase orders 20,000 Machining $5,000,000 number of machine hours 80,000 Testing $7,000,000 number of testing hours 250,000 Packaging and shipping $6,000,000 number of containers 300,000 Exhibit 3 Classic Artisan annual sales and production in units 500,000 80,000 number of units per batch 400 50 number of purchase orders 500 320 number of machine hours per unit 0.6 1 total number of testing hours 30,000 50,000 total number of containers 1,200 4,000 1. Calculate product margin for Classic and Artisan using the traditional costing system where overhead is applied at a rate of $30 per direct labor hour. The amount of product margin should be on a total basis and then Show the average product margin unit using the following template for guidance: Sales Direct materials Direct labor Manufacturing overhead Cost of goods sold Product margin Average product margin Classic 555 555 555 555 per unit Mfg 'U'J- '0")- 'UI- Artisan 555 $55 555 555 ME '0'!- 'UI