Case 5-68 Activity-Based Costing; Budgeted Operating Margin (LO 5-1, 5-2, 5-4, 5-5, 5-7)

Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20x1, is as follows:

WHITESTONE COMPANY

Budgeted Statement of Gross Margin for 20x1

JR-14 RM-13 Total

Sales in units 5,000 5,000 10,000

Sales revenue $ 1,700,000 $ 2,200,000 $ 3,900,000

Cost of goods manufactured and sold:

Beginning finished-goods inventory $ 240,000 $ 300,000 $ 540,000

Add: Direct material 1,000,000 1,750,000 2,750,000

Direct labor 185,185 92,593 277,778

Applied manufacturing overhead* 544,025 272,013 816,038

Cost of goods available for sale $ 1,969,210 $ 2,414,606 $ 4,383,816

Less: Ending finished-goods inventory 240,000 300,000 540,000

Cost of goods sold $ 1,729,210 $ 2,114,606 $ 3,843,816

Gross margin $ (29,210 ) $ 85,394 $ 56,184

________________________________________

*Applied on the basis of direct-labor hours:

Machining $ 424,528

Assembly 216,981

Material handling 56,604

Inspection 117,925

Total $ 816,038

________________________________________

Mark Ward, Whitestone's president, has been reading about a product-costing method called activity-based costing. Ward is convinced that activity-based costing will cast a new light on future profits. As a result, Brian Walters, Whitestone's director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13.

Cost Pool Information for 20x1

Cost Pool Activity JR-14 RM-13

Direct labor Direct-labor hours 10,000 5,000

Machining Machine hours 15,000 30,000

Assembly Assembly hours 6,000 5,500

Material handling Number of parts 5 10

Inspection Inspection hours 5,000 7,500

________________________________________

In addition, the following information is projected for the next calendar year, 20x2.

JR-14 RM-13

Beginning inventory, finished goods (in units) 800 600

Ending inventory, finished goods (in units) 700 700

Sales (in units) 5,100 4,900

________________________________________

On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.

Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.

Required:

2. Using activity-based costing, calculate the total cost for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities.

3. Prepare a table showing for each product line the estimated 20x2 cost for each of the following cost elements: direct material, direct labor, machining, assembly, material handling, and inspection.

4. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2, using activity-based costing.

Case 5-68 Activity-Based Costing; Budgeted Operating Margin (LO 5-1, 5-2, 5-4, 5-5, 5-7)

Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20x1, is as follows:

WHITESTONE COMPANY

Budgeted Statement of Gross Margin for 20x1

JR-14 RM-13 Total

Sales in units 5,000 5,000 10,000

Sales revenue $ 1,700,000 $ 2,200,000 $ 3,900,000

Cost of goods manufactured and sold:

Beginning finished-goods inventory $ 240,000 $ 300,000 $ 540,000

Add: Direct material 1,000,000 1,750,000 2,750,000

Direct labor 185,185 92,593 277,778

Applied manufacturing overhead* 544,025 272,013 816,038

Cost of goods available for sale $ 1,969,210 $ 2,414,606 $ 4,383,816

Less: Ending finished-goods inventory 240,000 300,000 540,000

Cost of goods sold $ 1,729,210 $ 2,114,606 $ 3,843,816

Gross margin $ (29,210 ) $ 85,394 $ 56,184

________________________________________

*Applied on the basis of direct-labor hours:

Machining $ 424,528

Assembly 216,981

Material handling 56,604

Inspection 117,925

Total $ 816,038

________________________________________

Mark Ward, Whitestone's president, has been reading about a product-costing method called activity-based costing. Ward is convinced that activity-based costing will cast a new light on future profits. As a result, Brian Walters, Whitestone's director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13.

Cost Pool Information for 20x1

Cost Pool Activity JR-14 RM-13

Direct labor Direct-labor hours 10,000 5,000

Machining Machine hours 15,000 30,000

Assembly Assembly hours 6,000 5,500

Material handling Number of parts 5 10

Inspection Inspection hours 5,000 7,500

________________________________________

In addition, the following information is projected for the next calendar year, 20x2.

JR-14 RM-13

Beginning inventory, finished goods (in units) 800 600

Ending inventory, finished goods (in units) 700 700

Sales (in units) 5,100 4,900

________________________________________

On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.

Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.

Required:

2. Using activity-based costing, calculate the total cost for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities.

Machining per machine hour Assembly per assembly hour Material handling per part Inspection per inspection hour Direct material Direct labor Machining Assembly Material handling lnspacon Total cost Sales revenue Cost of goods manufactured and sold: Beginning finished-goods inventory Cost of goods available for sale