Cost Allocation and Environmental Processes-Ethical ues Califomia Cincuits Company 8) manufactures a variety of comenas Is Vally function and parform equally wel. The difference in the two peoducts is the w muenial The XL Dchip is the older ofthe two conpoenes and as made with ametal espeB wash pn"" assembily. Originally, the plant seleasod the watwater dirocily into a local tiver Scvarl year ago, the company was orderod to treat the wascw alor befone its elene and inedely espensive equipment. While the oquipmens is fully depreciated amal aparating espames of Two years apo, company scimists develoged an alley wih all of the peopenes of the matcrial were prodaced and tested and found to be indstinguishable om the old components every way relating tothcir fitness fr uK The ordy difinne is that now y are espensive than the old aw mnerial The company has been test-makeing the newer venion of the componen, efereed to as XL-C, and is ornendly trying to decile s a the Assembly Department No other products are produced m information foe the The-mg ides Units produced Raw maerial coss per unit Direct labor-hours par unt Assembly Direct labor tale per hour-l lab Testing hours per unit (all in peoduction) Shipping wcight per unit (pounds) Wastewatcr gmcratod per uni (allons)00 240 Material handling Toting Depreciarion on equigment Shipping The company president believes that 's fo li to co e ing aully oquivalent products. At the same time, the opa imaps is somowh tied bece of a aucmp fund at another site(n*the Valey plant. The president wo.liketobedet.point o the Valley plant as an eample of company rescanch and develogmRADwokingo provide an vironmentally frienly prodact The cntroller points ou to the pe thus the company's financial position is shaky, and it cannot affoed to make podects inany way oher than .3C Required: a. 3C's curent cost accounting system charges overhead to products based on direct labor cost using a single plantwide rate. What product costs will it report for the two products if the curent allocasion system is used? b. The controller recently completed an executive odacation course descrihing the two-stage allocation procodare. Assume that the first stage allocates costs to departments and the second stage allocates costs to prodacts. The controller believes that the costs will be more accurate if machine-hours are uwed to allocate Production Department costs and labor-hours are used to allocate Assembly Department costs. What product costs will be reported for the two products if the two-stage allocation process is used? e. The company decides to compute prodact costs assuming an ABC system is implemented only in the Production Department. Overhead in Assembly will continue to be allocated based on direct labor cost. The oost drivers selected for the activity-based costing system are Overhead Icm Material handling Testing Wastewater treatment Driver Direct labor-hour Material cost Testing hours Wastewater generated Shipping Weight What product costs would be reported if this ABC system were implemented? Assume that the peoduction max and costs would remain as originally planned d. Please briefly discuss the advantages and disadvantages of the three cost allocation methods above, including traditional single plantwide rate cost allocation, two-stage departmental allocasion, and activity-based costing. What is your suggestion for the president if you were the controller e. Because the two products are identical in their use, the controler argues that the decision should be made on cost alone. Do you agree? Explain California Circuits Company (3C)-ufactures a variety of components. Its Valley plant spocializes in two clectronic components used in circuit boands. These components scrve the same function and perform equally well. The difference in the two peoducts is the raw material. The XL- D chip is the older of the two components and is made with a metal that requires a wash price assembly. Originally, the plant released the wastewater directly into a local river Several years ago, the company was ondered to treat the wastewater before its release, and it instaliled relatively expensive equipment While the equipment is fully depreciated annual operating expemses of $250,000 are still incurred for wastewater treatment. Two years ago, company scintists developed an alloy with all of the propeitics of the w materials used in XL-D tha generates no wastewater. Some prootype components using the new matcrial were produced and tested and found to be indistinguishable from the old components in every way relating to their fitness foe use. The only difSerence is that the new alloy is more expensive than the old fawaerial The company has been tes-marketing the newer version of the compenent, referred to as XL-C, and is currently trying to decile its fate Manufacturing of both componcets begins in the Production Depurtment and is compiesed in the Assembly Department. No other products are produced in the plant. The following provides Units produce Raw material costs per unit Direct laboe-hours per unit-Prodection Direct laboe-hours per unit- Assembly Direct laboe rate per hour-all labor Machine-hours per unil-Production 100,000 25,00 0.1 0.1 $20 $20 1.6 Testing hours per unit (ain production) 3.0 Shipping weight per unit (pounds) Wastewater generated per unit (gallons) 100 3.0 1.0 Annoal overhcad costs for the two departments tollow S S 240,000 100,000 93,000 150,000 Material handling 40,00) Wastewater treatment 400,000 120,000 1,000,000 S 500,000 The compamy peesident believes that it's foolish to conanue producing two essentially equivalent products. At the same time, the corporate image is somew hat tarnished because of a toxic dump found at another site (not the Vallcy plant), The prosident would like to be able to poine to the Valley plant as an example of company research and developmont (R&D) working to provide an environmentally friendly prodact The controller points out to the president that the company's financial position is shaky, and it cannot affiond to make products in any way other than 1:04 Driver