Case information

Beginning of the year: January 1, 2022 StylPen, Inc. recently hired you on a special project to manage the cost accounting function for its pen division. StylPen's pen division produces two products, a "basic" plastic pen and a "customized" plastic pen that can be produced in different shapes and colors and imprinted with logos and mottos chosen by the customer. The division buys in plastic stock from which it injection molds pen casings. Ink cartridges are also purchased and assembled with the casings to produce the final product. The pen division has encountered increasing competition, especially in the basic pen market, where bidding on contracts is fierce. Cost competitiveness is essential and StylPen has been struggling especially against single-product competitors. StylPen has been more successful in the custom market where, although profit margins are higher, the company has been winning a higher proportion of its competitive bids. Consequently, StylPen's product mix has been shifting in favor of the more profitable custom pens. Activity on the production floor has increased with this shift. Custom pens are produced in smaller batches and engineering changes are often required to satisfy the preferences of particular customers.

In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, 1) manufacturing operations and 2) machine setups, were identified. Production costs related to these activities are now assigned to the two lines of pens based on the cost drivers of 1) machine-hours and 2) 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 custom pens take longer to setup and allocating setup costs based on setup labor-hours better represents resources consumed by the two pen lines. The pen division is growing in complexity and part of your job is to manage and explain the more advanced accounting information system used within the division.

Your first task is to review the pen division's existing costing and budgeting information. To your dismay you are told that the division's records are in disarray and the 2022 budget has not been compiled. Since you are short on time, you decide to use the information from the last year's (2021) records to initial examination of the division. These records include some budget estimates assembled before the start of 2021 and actual information for 2021.

A. Budget information assembled at the start of 2021
	Basic Pen	Customized Pen
Budgeted production	2,500,000	800,000
Number of pens per batch	5,000	1,000
Setup labor-hours per batch	2 hours	8 hours
Budgeted machine hours	5,000 hrs	3,200 hrs
Budgeted direct manufacturing labor	25,000 hrs	16,000 hrs
Budgeted plastic per pen casing	1/16 pound	1/8 pound
Budgeted cartridges per pen	1	1

B. Actual information for 2021 that can be traced directly to each product:
	Basic Pen	Customized Pen
Direct material used (plastic & cartridge)	$2,160,000	$1,120,000
Pen casings per pound of plastic	16 Casings	8 Casings
Plastic cost *	$8 per pound
Plastic in inventory (12/31/2021) *	12,000 pounds
Ink cartridge cost *	$0.40 per unit
Ink cartridges in inventory (12/31/2021) *	180,000 cartridges
Direct labor cost	$336,000	$320,000
Direct labor hours	24,000 hours	16,000 hours
Machine hours used in total	4,800 hours	3,200 hours
Number of inspection hours in total	1,000 hours	2,000 hours
Pens per batch	5,000	1,000
Number of batches	480	800
Number of engineering changes	0	10
Setup labor hours	960	6,400
Total sales commissions	$132,000	$96,000
Units produced	2,400,000	800,000
Units sold	2,200,000	800,000
Pens in inventory (01/01/2021)		0
Sales revenue	$3,300,000	$2,240,000
* The same plastic stock and ink cartridges are used for the Basic and Custom pens

Month	Machine-Hours	Manufacturing Operations Overhead Cost	Setup-Hours	Setup Overhead Cost	Direct Labor Hours
Jan	425	$ 31,313	401	$ 40,000	2,500
Feb	545	$ 34,321	426	$ 44,555	2,220
Mar	521	$ 33,453	500	$ 42,424	1,890
Apr	689	$ 35,312	499	$ 44,444	3,090
May	613	$ 38,378	567	$ 48,888	2,880
Jun	658	$ 36,888	599	$ 49,990	5,700
Jul	775	$ 38,556	656	$ 54,321	3,900
Aug	850	$ 39,988	690	$ 53,567	5,600
Sep	880	$ 39,423	840	$ 52,525	4,990
Oct	732	$ 40,432	755	$ 58,000	3,270
Nov	658	$ 36,394	700	$ 48,484	2,390
Dec	654	$ 36,542	727	$ 46,802	1,570
Total	8,000	$441,000	7,360	$584,000	40,000

C. Additionally, the pen division had the following actual costs in 2021 that were not directly traced to either product:

Actual Manufacturing Overhead Costs - 2021

Actual Annual Period Costs - 2021
Advertising expense	$200,000
Sales department salaries	$175,000
Selling and administration depreciation	$ 75,000

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 2022 budget is as follows:
  • The budgeted unit input quantities for materials, labor and MOH (machine hours and setup labor hours) used in 2021 will also be used in the 2022 budget.
  • The cost of plastic is expected to increase by 15% in 2022 over 2021 actual costs. The cost of cartridges is expected to increase by 20% in 2022 over 2021 actual costs.
  • Budgeted labor rates in 2022 are expected to increase by 10% over 2021 actual rates for Basic pens and 20% over 2021 actual rates for Customized pens.
  • Calculate 2022 budgeted variable moh rates and total fixed mohfrom 2021 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.
  • Assume non-cash (e.g., depreciation) MOH item amounts remain unchanged from budgeted 2021 data.
  • Production and sales forecasts are within the relevant range.
  • Budgeted variable period costs per unit and fixed costs in totalfor 2022 are assumed to be the same as actual period costs in 2021.
  • An 8% increase in selling price for 2022 is expected for the Basic model and a 15% increase in selling price for the Customized model, over actual 2021 prices.
• Normal costing is used.
• There are two cost drivers for manufacturing overhead costs - machine-hours and setup labor-hours.
• Machine-hours is the cost driver for the variable portion of manufacturing operations overhead. Machine-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 basic pen are 2,460,000 in 2022, 2,700,000 in 2023, and 2,800,000 in 2024.
• Projected sales for the customized pen are 820,000 in 2022, 900,000 in 2023, and 1,000,000 in 2024.
• Sales commission is paid as a rate per pen sold.
• 2022 input cost and quantity standards for direct material, direct manufacturing labor and manufacturing overhead are the same as 2022 budgeted input costs and quantities.
• You require an ending inventory of basic pens of 20% of next year's total sales needs. Customized pens are made to order, and no inventory of finished goods is planned.
• You require ending raw material inventories of plastic stock and ink cartridges of 10% of next year's production needs (for both product lines).
• Your beginning 2022 cash balance is $150,000. The company requires a minimum cash balance of $100,000.
• Assume a FIFO cost flow
• Assume no WIP inventory.

Requirements

1. For the Manufacturing Operations overhead activity, evaluate the selected cost driver (i.e., MHrs.) and compare it to the cost driver of Direct Labor Hours that was previously used by the division. Refer to Exhibit 10-19. i.e., run regressions for DLHrs as the cost driver for Manufacturing Operations activity and compare the results according to the first three criteria in Ex 10-19.

2. 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 $200,000. Use 2022 budgeted information - refer to section D bullet point 2 and your output results from requirement 5 - link the output results to your model.