Environmental costs, activity-based costing

Bevans Co. makes two products, Product X, and Product Y. Bevans has produced Product X for many years without generating any hazardous wastes. Recently, Bevans developed Product Y, which is superior to Product X in many respects. However, production of Product Y generates hazardous wastes. Because of the hazardous wastes, Bevans now must deal with hazardous waste disposal, governmental environmental reports and inspections, and safe handling procedures. Bevans Co. uses an indirect cost rate based on machine hours to assign manufacturing support costs to its two products. Because of concerns about the accuracy of the product costing system, Joel Dempsey, the controller, undertook an activity-based costing analysis of the manufacturing support costs, including an analysis of the support costs related to Product Y's generation of hazardous wastes. The resulting cost information, as well as machine hours and a number of units, is summarized in the following table:

PRODUCT X PRODUCT Y

Direct costs (material plus labor) 9,000,000 $4,000,000

Environmental support costs ----------- $14,000,000

Nonenvironmental support costs $22,000,000 $29,000,000

Total machine hours 10,000,000 6,000,000

Number of units 100,000,000 40,000,000

Required

Compute product costs per unit for Products X and Y using the current indirect cost rate based on machine hours for manufacturing support costs.

Compute product costs per unit for Products X and Y using the activity-based costing figures provided in the table.

Explain the reasons for the differences in cost for each product using the two cost systems.

Bevans has been selling products X and Y at a price equal to 1.5 times the product cost computed using the machine-hour-based cost driver rate for manufacturing support costs. Compute these prices and provide recommendations to Bevans management concerning profit improvement through pricing changes and cost reduction through manufacturing improvements.