Case information

Beginning of the year: January 1, 2018

The Good-Crack Company (GCC) Inc., a baseball products manufacturer, recently hired you as a management accountant in its Bat division. GCCs Bat division produces two products, an entry-level batmade of Northern White Ash and a pro-series bat made of Rock Maple wood. The production process involves turning the wood (billets) on a lathe and then sanding and finishing work to complete each bat. The entry-level bat comes in a standard size/weight and finish. The pro-series bat requires additional attention to procurement, quality control, and sanding and finishing work. The pro-series bat is sold toprofessional players, who visit the production facilities to discuss technical details such as weight, balanceand personalization. The pro-series line of bats was recently introduced and GCC has been selling as many of this product as it can produce. Further expansion of the pro-series bat is planned; however, production personnel are not too enthusiastic about this because of the manufacturing demands placed on them by this additional product.

In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, manufacturing operations and machine setups, were identified. Productioncosts related to these activities are now assigned to the two lines of bats based on the cost drivers of direct manufacturing labor and setup labor hours, respectively. The old product costing system allocated all manufacturing overhead based on direct manufacturing labor hours. Your predecessor argued for a move to ABC because production runs for the pro-series bat take longer to setup and allocating setup costs based on setup labor hours better represents resources consumed by the two bat lines. The bat division is growing in complexity and part of your job is to manage and explain the more advanced accounting information systems used within the division.

Your first task is to review the bat divisions existing costing and budgeting information. To your dismayyou are told that the divisions records are in disarray and the 2018 budget has not been compiled. Since you are short on time, you decide to use the information from the last years (2017) records to do an initial examination of the division. These records include some budget estimates assembled before the start of 2017 and actual information for 2017.

A.Budget information assembled at the start of 2017
	Entry-level Bats	Pro-series Bats
Budgeted production	50,000	10,000
Number of bats per batch	100	20
Setup labor hours per batch	5 hours	8 hours
Feet of lumber per bat	4 feet	4 feet
Direct labor hours per bat	1 hr	2 hrs

Manufacturing Operations Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Maintenance Fixed costs Depreciation Supervision Power Maintenance	$25,000 80,000 21,000 85,000 35,000 100,000 82,000 60,000	$211,000 $277,000
Machine Setup Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Fixed costs Depreciation Supervision Power	$40,000 80,000 60,000 75,000 25,000 40,000	$180,000 $140,000

B. Actual information for 2017 that can be traced directly to each product:
	Entry-level Bats	Pro-series Bats
Direct material cost (DM Used)	$1,050,000	$266,000
Feet of lumber per bat (billets)	4 feet	4 feet
Lumber in inventory (12/31/2017)	40,000 feet	10,000 feet
Direct labor cost	$866,250	$456,000
Direct labor hours per Bat	1.1 hour	2.4 hours
Number of bats per batch	100	20
Number of batches	525	475
Setup labor hours per batch	5	8
Setup labor hours	2,625	3,800
Total sales commissions	$240,000	$95,000
Units produced	52,500	9,500
Units sold	48,000	9,500
Bats in inventory (1/1/2017)	2,000 @ $44.44 each	0
Sales revenue	$2,832,000	$1,282,500

C. Additionally, the Bat division had the following actual costs in 2017 that were not directly traced to either product:

Actual Manufacturing Overhead Costs - 2017

Month	Direct Labor-Hours	Cost	Setup-Hours	Cost
Jan	5,472	$ 34,755	301	$ 21,959
Feb	5,322	$ 31,658	326	$ 23,959
Mar	5,422	$ 34,276	400	$ 22,424
Apr	6,873	$ 41,889	399	$ 24,444
May	7,054	$ 40,788	467	$ 24,888
Jun	8,531	$ 44,987	499	$ 29,990
Jul	9,753	$ 49,785	556	$ 34,321
Aug	8,944	$ 51,265	590	$ 33,567
Sep	7,320	$ 46,387	820	$ 34,833
Oct	6,311	$ 43,200	725	$ 34,131
Nov	4,977	$ 42,265	645	$ 38,484
Dec	4,571	$ 35,745	697	$ 32,000
Total	80,550	$497,000	6,425	$355,000

Actual Period Costs - 2017
Advertising expense	$240,000
Sales department salaries	210,000
Selling and administration depreciation	35,000

D. Based on the information you have gathered, you also make the following assumptions:

Because of past financial trouble in the division, all expenses must be paid in cash. No sales are made on account (all sales are cash sales).

Information for the 2018 budget is as follows:

o The budgeted unit input quantities for materials used in 2017 will also be used in the 2018budget.

o For the entry-level bat the budgeted unit input quantities for labor and MOH (direct manufacturing labor- hours and machine setup labor hours) used in 2017 will also be used in the 2018 budget

o For the pro-series bat the budgeted unit input quantity for direct manufacturing labor will be 2.4 hours/unit. The budgeted unit input quantity for setup labor hours used in 2017 will also be used in the 2018 budget

o The cost of Ash and Maple are budgeted to increase by 10% in 2018 over 2017 actual costs.

o Budgeted labor rates in 2018 are expected to increase by 8% over actual rates in 2017.

o Calculate 2018 budgeted variable moh rates and total fixed moh from 2017 actual monthly cost and activity data. Use Regression Analysis to determine estimates for variable and monthly fixed costs. Convert monthly estimates of fixed costs into annual costs.

o Assume non-cash MOH item amounts remain unchanged from budgeted 2017 data.

o Production and sales forecasts are within the relevant range.

o Budgeted variable period costs per unit and fixed costs in total for 2018 are assumed to be the same as actual period costs in 2017.

o A 5% increase in selling price for 2018 is expected for both the entry-level and the pro-series bats.

Normal costing is used.

There are two cost drivers for manufacturing overhead costs direct manufacturing labor-hours and setup labor-hours.

Direct manufacturing labor-hours is the cost driver for the variable portion of manufacturing operations overhead. Direct manufacturing labor-hours is also used to allocate the fixed portion of manufacturing operations overhead.

Setup labor-hours is the cost driver for the variable portion of machine setup overhead. Setup labor-hours is also used to allocate the fixed portion of machine setup overhead.

Projected sales for the entry-level Bat are 52,000 in 2018, 50,000 in 2019, and 48,000 in 2020.

Projected sales for the pro-series Bat are 10,400 in 2018, 11,000 in 2019, and 12,000 in 2020.

Sales commission is paid as a rate per bat sold.

2018 input cost and quantity standards for direct materials, direct manufacturing labor and manufacturing overhead are the same as 2018 budgeted input costs and quantities.

You require an ending inventory of entry-level Bats of 20% of next years total sales needs. Pro-seriesbats are made to order and no inventory of finished goods is planned.

You require an ending raw material inventory of 30% of next years production needs (for both product lines).

Assume a FIFO cost flow

Assume no WIP inventory.

Your beginning cash balance is $125,000 for 2018. The company requires a minimum cash balance of $100,000.

Requirements

Requirements for the two parts of the case are listed below. Better answers will clearly present workings for calculations and provide well written answers for discussion questions. Presenting calculations so that management can understand them is important. The quality of your spreadsheet will be graded create a model that can be easily updated and modified by using appropriate formulas and referencing. See Canvasfor model design tips. Relate discussion question answers to the case and where appropriate reference articles, textbooks, or your own experience. Present your own work, in your own words, and adequately reference your sources.

Requirements

Actual and Normal Costing, CVP analysis, and Activity-Based Costing

1. What were the budgeted indirect cost rates for the manufacturing operations activity and the machine setup activity in 2017?

2. Was overhead over- or under-applied for the year? By how much?

3. What was the unit product cost for the entry-level and pro-series Bats under normal costing?

4. What was the Bat Divisions operating income for 2017? Use normal costing and adjust for mis-applied MOH.

5. Use the 2017 actual monthly MOH information to calculate annual estimates of cost behavior (fixed and variable components) for each MOH activity. These estimates will be used for the 2018 budget. Use the Regression function found under Data: Data Analysis in Excel. Place output on a separate sheet.

6. For Setup Operations overhead activity, evaluate the selected cost driver and compare it to the alternative of Direct Labor Hours as the cost driver. Refer to Exhibit 10-18. i.e., run a regression for DLHrs as the cost driver for Setup Operations activity and compare the results according to the criteria in Ex 10-18.

7. Calculate the break-even point in units (calculate the number of units of each product required), and the number of units of both products that must be sold to earn an operating income of $150,000. Use 2018budgeted information refer to section D bullet point 2 and your results from requirement 5.

8. Discuss the activity-based costing (ABC) system designed and implemented by your predecessor.

I. Evaluate the recently implemented ABC system at GCC in comparison to the old system, which allocated all MOH on the basis of direct manufacturing labor (compare product costs under both systems show calculations).

II. Make recommendations to improve the system. If appropriate, provide examples of additional activities and cost drivers GCC could use. Justify your choices.

Discuss activity-based management (ABM) and describe how it can be applied at GCC (note, written answers to part 8 should be about 3 pages in length)