Homework $1$

Hindenburg Inc. is an automobile manufacturer in the city of New Orleans, Louisiana that

specializes in farm$-$related vehicles, such as tractors, etc. They have two types of tractors $-$

Standard and Custom. Despite high demand, company president, Mr$.$ Adani, is concerned about

losses the company is incurring for Custom tractors. Since the competition in the segment is high,

he needs to keep the prices in line with his competitors. While he believes his costing system is

correct, he is concerned that some costs are not classified properly across two types of vehicles.

$He$ is currently using traditional costing methodology based on direct labor hours to estimate

manufacturing overheads for each tractor.

Mr$.$ Adani has hired a recently designated CPA to help him solve the dilemma. The CPA has

decided to implement an activity$-$based costing system designed to provide relevant information

to assist with decision making. The ABC system she designed has three activity cost pools: Order

processing costs, machine processing costs, and product inspection costs. These activities are

driven by number of orders processed $($Order processing activity$),$ machine hours worked

$($Machine processing costs$),$ and inspection hours $($Product inspection costs$).$

The following actual costs will be assigned using the activity$-$based costing system:

To get started the CPA has asked that she review the sales figures and other relevant information

about two models of tractors $($standard and custom$).$ The information related to the tractors is as

follows:

Required:

Assuming use of direct labor hours as cost driver, compute the unit manufacturing cost of

the standard and custom tractor.

Assuming use of activity$-$based costing, compute the unit manufacturing cost of the

standard and custom tractors.

Calculate the amount of cost$-$distortion based on traditional costing and activity$-$based

costing and explain the reasons for incurred losses for custom tractor earlier.