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Elkin Company manufactures wheel rims. The controller budgeted ABC allocation rates for 2024. Elkin produces two wheel rim models: standard and deluxe. Budgeted data
Elkin Company manufactures wheel rims. The controller budgeted ABC allocation rates for 2024. Elkin produces two wheel rim models: standard and deluxe. Budgeted data for 2024 are as follows: (Click the icon to view the 2024 allocation rates and budgeted data.) (Click the icon to view additional information, budgeted information and the deluxe unit cost calculation.) Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. He had a market research study conducted. (Click the icon to view the results of the market research.) Would implementing the value engineering recommendation enable Elkin to achieve its target cost for the deluxe rim? Begin by selecting the formula to allocate overhead (OH) costs. Then enter the amounts to calculate the revised finishing activity cost per rim. Data table x - Data table = Allocated mfg. overhead costs Activity Allocation Base Materials handling Machine setup Number of parts Number of setups Insertion of parts Number of parts Finishing Number of finishing hours Predetermined Overhead Allocation Rate $4.00 per part 800.00 per setup In 2025, Elkin's managers used the same indirect manufacturing costs per wheel rim that they computed in 2024 using activity-based costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company's standard and deluxe models for 2025. Standard Deluxe 23.00 per part 80.00 per hour Sales price Direct materials Direct labor $ 900.00 $ 1,180.00 35.00 45.00 51.00 53.00 Standard Deluxe Parts per rim 6.0 7.0 Quantity of allocation Predetermined Allocated activity overhead allocation Setups per 500 rims 14.0 14.0 ABC cost per unit: base used rate cost per rim (Deluxe) Finishing hours per rim 3.0 4.5 Materials handling 7.0 $ 4.00 = $ 28.00 Total direct labor hours per rim 4.0 5.0 Machine setups 0.028 x $ 800.00 = 22.40 Insertion of parts 7.0 * $ 23.00 - 161.00 More info Finishing direct labor hours 360.00 4.5 $ 80.00 = $ 571.40 Total Market research shows that for the deluxe rim to provide a reasonable profit, Elkin will have to meet a target manufacturing cost of 645.00 per rim. A value engineering study by Elkin's employees suggests that modifications to the finishing process could cut finishing cost from $80.00 to $70.00 per hour and reduce the finishing direct labor hours per deluxe rim from 4.5 hours to 4.0 hours. Direct materials would remain unchanged at $51.00 per rim, as would direct labor at $53.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same.
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