d. After hearing the consultant's recommendations, the CFO decides to adopt activity-based costing but expresses concern about not allocating some of the overhead to the products (plant adminis- tration and other fixed overhead). In the CFO's view, "Products have to bear a fair share of all overhead or we won't be covering all of our costs." How would you respond to this comment? 9-60. Activity-Based Costing, Cost Flow Diagram, and Predetermined Overhead Rates Churchill Products is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. The company's cost accountant has identified three over- head cost pools along with appropriate cost drivers for each pool. Cost Pools Costs Utilities Scheduling and setup.. Material handling. $1,350,000 1,350,000 3,600,000 Activity Drivers 90,000 machine-hours 900 setups 2,400,000 pounds of material Part III Cost Management Systems The company manufactures three models of water basins (Oval, Round, and Square). The plans for production for the next year and the budgeted direct costs and activity by product line are as follows. Oval Total direct costs (material and labor) Total machine-hours Total number of setups. Total pounds of material. Total direct labor-hours Number of units produced $240,000 45,000 120 750,000 4,800 6,000 Products Round Square $240,000 $ 240,000 15,000 30,000 450 330 450,000 1.200,000 2.700 7.500 3,000 9,000 Required a. The current cost accounting system charges overhead to products based on direct labor-hours. What unit product costs will be reported for the three products if the current cost system con- tinues to be used? b. A consulting firm has recommended using an activity-based costing system, with the activi- ties based on the cost pools identified by the cost accountant. Prepare a cost flow diagram of the proposed ABC system. What are the cost driver rates for the three cost pools identified by the cost accountant? d. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant's classification of cost pools is used? If management should decide to implement an activity-based costing system, what benefits should it expect? 9-61. Activity-Based Costing. Cost Flow Diagram, and Predetermined Overhead Rates Utica Manufacturing (UM) was recently acquired by MegaMachines, Inc. (MM), and organized as a separate division within the company. Most manufacturing plants at MM use an ABC system, but UM has always used a traditional product costing system. Bob Miller, the plant controller at UM has decided to experiment with ABC and has asked you to help develop a simple ABC sy would help him decide if it was useful. The controller's staff has identified costs for the f in the four overhead cost pools along with appropriate cost drivers for each pool. nrrr
