Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.

The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:

Cost Pools Costs Activity Drivers

Receiving $600,000 Direct material cost

Manufacturing $5,500,000 Machine-hours

Machine setup $900,000 Production runs

Shipping $1,000,000 Units shipped

In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations.

Products:

Standard Deluxe

Total direct material costs $220,000 $180,000

Total direct labor costs $650,000 $300,000

Total machine-hours 140,000 110,000

Total number of setups 100 100

Total pounds of material 15,500 11,500

Total direct labor-hours 6,250 4,000

Number of units produced and shipped 15,000 10,000

Required:

a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?

Answers: