Answered step by step
Verified Expert Solution
Question
1 Approved Answer
CORTLAND MANUFACTURING COMPANY Exhibit 1. Direct Manufacturing Costs for One Computer Cortland 1000 $1,000 $200 Cortland 2000 Raw (direct) material $2,500 $400 Direct labor Exhibit
CORTLAND MANUFACTURING COMPANY Exhibit 1. Direct Manufacturing Costs for One Computer Cortland 1000 $1,000 $200 Cortland 2000 Raw (direct) material $2,500 $400 Direct labor Exhibit 2. Analysis of Annual Budgeted Manufacturing Overhead Costs Cost Driver Budgeted Activity 200 Budgeted Cost $90,000,000 12,000,000 60,000,000 Activity Raw material handling Received orders Machine adjusting Packing Raw material inspecting Inspecting hours Soldering Assembly Setups 2,000 500 Batches 200,000 200,000 100,000 10,000,000 12,000,000 12.000.000 Soldering hours Assembly hours Total $196,000,000 Exhibit 3. Annual Production Data for Cortland 1000 and Cortland 2000 Computers Cortland 1000 Cortland 2000 Measure no. of computers size of order Item 20,000 10,000 5,000 500 Budgeted production Received order size* 100 5,000 Batch size computers per batch hours per computer hours per computer hours per computer 6 5 Machine setups Inspecting time Soldering time Assembly time 2 1 1 3 1 1 The company received 2 orders of raw materials each year for the Cortland 1000 (i.e., 20,000 computers - 10,000 order size) BACKGROUND CMI manufactured several different models of computers that it sold directly to hospitals and health systems in all 50 states of the United States. The company prided itself on the user-friendly nature of its computers, and in particular on the ability of computers to facilitate graphical presentations. It was superb graphics that CMI claimed distinguished its computers from those of its competitors. Hospitals located the computers at nursing stations, and both nurses and physicians had found them invaluable to obtaining patient-related information on a real-time basis CMI purchased its raw materials in units that were made to its specifications. It used a single factory to manufacture all its computers. The factory workers operated three kinds of machines. Inspecting machines checked the raw materials and tested the components to assure that they met the company's specifications. Soldering machines then soldered various components togetther. Assembly machines put all the components together into finished products (which varied by computer model) About 40 percent of CMI's manufacturing overhead was for depreciation, maintenance, and repairs on the inspecting, soldering, and assembly machines. The rest was in receiving and handling the raw materials, in adjusting the machines to set them up for each batch of computers, and in inspecting the finished computers and packing them for shipment. The actual manufacturing effort (inspecting, soldering, and assembly) was mainly automated, and CMI used little direct labor. The company also operated on a just-in-time (JIT) manufacturing basis, such that there were almost no inventories at the end of each month Most of the computers sold in large quantities. However, the Cortland 2000 did not. It represented a recent effort by CMI to enter the scientific computing market by focusing on physicians who managed large research grants and needed sophisticated computing power in their laboratories and other research facilities. It was a state-of-the-art computer with several special features. In particular, it (a) used a new processing chip that the company imported from Sweden, (b) had special patented random access memory (RAM) that gave it extremely high input-output speeds, and (e) was manufactured in very small batches too assure uniform quality from one computer to the next. FINANCIAL INFORMATION CMI's budgeted direct-labor costs were $60 million. Based on expected sales, the company estimated that its raw material purchases and use would total $300 million. Manufacturing overhead was budgeted at $196 million, and currently was assigned to each computer on the basis of machine hours. As indicated above computers were priced at full production cost plus a markup of 50 percent Exhibit 1 shows the expected direct manufacturing cost for two of the company's computers. The Cortland 1000 was a very popular computer with a large production and sales volume. By contrast, the quantity of Cortland 2000s manufactured and sold was expected to be much lower than any of the company's other computers. Nevertheless, Mr. Works had thought that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount of money to CMI's selling, general, and administrative costs, and hence to the company's overall profits Mr. Works' concern had arisen because CMI's accountant had told him that he thought the company's traditional product-costing system was providing misleading cost information. He had developed an analysis of the budgeted manufacturing overhead costs, shown in Exhibit 2. Data for the annual production of Cortland 1000 and Cortland 2000 computers are shown in Exhibit 3. Mr. Works commented: Assignment Determine the full product cost and selling prices of one Cortland 1000 and one Cortland 2000 under the current product costing system. How would these costs change under an activity-based costing system? 1. 4.1 Calculations (6 marks) To present calculations that relate to the quantitative analysis of the problems and issues of this business Marks are awarded based on: presenting calculations that are related to the analysis of the problems and issues as identified in Section 2, and accuracy of the calculations. CORTLAND MANUFACTURING COMPANY Exhibit 1. Direct Manufacturing Costs for One Computer Cortland 1000 $1,000 $200 Cortland 2000 Raw (direct) material $2,500 $400 Direct labor Exhibit 2. Analysis of Annual Budgeted Manufacturing Overhead Costs Cost Driver Budgeted Activity 200 Budgeted Cost $90,000,000 12,000,000 60,000,000 Activity Raw material handling Received orders Machine adjusting Packing Raw material inspecting Inspecting hours Soldering Assembly Setups 2,000 500 Batches 200,000 200,000 100,000 10,000,000 12,000,000 12.000.000 Soldering hours Assembly hours Total $196,000,000 Exhibit 3. Annual Production Data for Cortland 1000 and Cortland 2000 Computers Cortland 1000 Cortland 2000 Measure no. of computers size of order Item 20,000 10,000 5,000 500 Budgeted production Received order size* 100 5,000 Batch size computers per batch hours per computer hours per computer hours per computer 6 5 Machine setups Inspecting time Soldering time Assembly time 2 1 1 3 1 1 The company received 2 orders of raw materials each year for the Cortland 1000 (i.e., 20,000 computers - 10,000 order size) BACKGROUND CMI manufactured several different models of computers that it sold directly to hospitals and health systems in all 50 states of the United States. The company prided itself on the user-friendly nature of its computers, and in particular on the ability of computers to facilitate graphical presentations. It was superb graphics that CMI claimed distinguished its computers from those of its competitors. Hospitals located the computers at nursing stations, and both nurses and physicians had found them invaluable to obtaining patient-related information on a real-time basis CMI purchased its raw materials in units that were made to its specifications. It used a single factory to manufacture all its computers. The factory workers operated three kinds of machines. Inspecting machines checked the raw materials and tested the components to assure that they met the company's specifications. Soldering machines then soldered various components togetther. Assembly machines put all the components together into finished products (which varied by computer model) About 40 percent of CMI's manufacturing overhead was for depreciation, maintenance, and repairs on the inspecting, soldering, and assembly machines. The rest was in receiving and handling the raw materials, in adjusting the machines to set them up for each batch of computers, and in inspecting the finished computers and packing them for shipment. The actual manufacturing effort (inspecting, soldering, and assembly) was mainly automated, and CMI used little direct labor. The company also operated on a just-in-time (JIT) manufacturing basis, such that there were almost no inventories at the end of each month Most of the computers sold in large quantities. However, the Cortland 2000 did not. It represented a recent effort by CMI to enter the scientific computing market by focusing on physicians who managed large research grants and needed sophisticated computing power in their laboratories and other research facilities. It was a state-of-the-art computer with several special features. In particular, it (a) used a new processing chip that the company imported from Sweden, (b) had special patented random access memory (RAM) that gave it extremely high input-output speeds, and (e) was manufactured in very small batches too assure uniform quality from one computer to the next. FINANCIAL INFORMATION CMI's budgeted direct-labor costs were $60 million. Based on expected sales, the company estimated that its raw material purchases and use would total $300 million. Manufacturing overhead was budgeted at $196 million, and currently was assigned to each computer on the basis of machine hours. As indicated above computers were priced at full production cost plus a markup of 50 percent Exhibit 1 shows the expected direct manufacturing cost for two of the company's computers. The Cortland 1000 was a very popular computer with a large production and sales volume. By contrast, the quantity of Cortland 2000s manufactured and sold was expected to be much lower than any of the company's other computers. Nevertheless, Mr. Works had thought that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount of money to CMI's selling, general, and administrative costs, and hence to the company's overall profits Mr. Works' concern had arisen because CMI's accountant had told him that he thought the company's traditional product-costing system was providing misleading cost information. He had developed an analysis of the budgeted manufacturing overhead costs, shown in Exhibit 2. Data for the annual production of Cortland 1000 and Cortland 2000 computers are shown in Exhibit 3. Mr. Works commented: Assignment Determine the full product cost and selling prices of one Cortland 1000 and one Cortland 2000 under the current product costing system. How would these costs change under an activity-based costing system? 1. 4.1 Calculations (6 marks) To present calculations that relate to the quantitative analysis of the problems and issues of this business Marks are awarded based on: presenting calculations that are related to the analysis of the problems and issues as identified in Section 2, and accuracy of the calculations
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started