ities Cases LO 1, 3, 4, 5, 10 4-42 Comparison of two costing systems, activity-based management Redwood City plant of Crimson Components Company makes two types of rotators for auto e bile engines: R361 and R572. The old cost accounting system at the plant traced support costs: four cost pools: Cost POOL SUPPORT COSTS COST DRIVER S1 S2 P1 P2 Direct labor cost Machine hours $1,176,000 1,120,000 480,000 780,000 $3,556,000 Pool S1 included service activity costs related to setups, production scheduling, plant adm- istration, janitorial services, materials handling, and shipping. Pool S2 included activity coss related to machine maintenance and repair, rent, insurance, power, and utilities. Pools P1 and ? included supervisors' wages, idle time, and indirect materials for the two production departmens casting and machining, respectively. The old accounting system allocated support costs in pools S1 and 52 to the two production departments using direct labor cost and machine hours, respectively, as the cost drivers. Then the accumulated support costs in pools P1 and P2 were applied to the products on the basis of dires labor hours. A separate rate was determined for each of the two production departments. The direct labor wage rate is $15 per hour in casting and $18 per hour in machining. 180 Chapter 4 Activity-Based Cost Systems OBECT LABOR HOURS (QUI R361 R572 TOTAL DEPARTMENT Casting (P1) Machining (P2) Total 60,000 72,000 132,000 20,000 48,000 68,000 80,000 120,000 200,000 DIRECT LABOR COSTS $1,200,000 2,160,000 $3.360.000 MACHINE HOURS (MH) R572 TOTAL DEPARTMENT Casting (Pi) Machining (P2) Total R361 30,000 72.000 102,000 10,000 48,000 58,000 40,000 120,000 160,000 R361 R572 ITEM Sales price per unit Sales and production units Number of orders Number of setups Materials cost per unit $19 500,000 1,000 2,000 $8 $20 400,000 1,000 4,000 $10 Now the plant has implemented an activity-based costing system. The following table presents the amounts from the old cost pools that are traced to each of the new activity cost pools: OLD COST Pools S2 P1 12 ACTIVITY COST DRIVERS P1-DLH P2-DLH Setup hours P1-MH P2-MH Total 51 $120,000 240,000 816,000 0 0 $1,176,000 $0 0 80,000 260,000 780,000 $1,120,000 $120,000 0 240,000 120,000 0 $480,000 $0 120,000 540,000 0 120,000 5780,000 TOTAL $240,000 360,000 1,676,000 380,000 900,000 $3,556,000 Setups for R572 are 50% more complex than those for R361; that is, each R572 setup takes 1.5 times as long as one R361 setup. Required a. Determine the product costs per unit using the old system. Show all intermediate steps for allocations, including departmental cost driver rates and a breakdown of product costs into each of their components. b. Determine the product costs per unit using the new system. c. Explain the intuitive reason that the product costs differ under the two accounting systems. d. What should Crimson Components do to improve the profitability of its Redwood City plant? Include marketing and product-related changes among your recommendations. e. Describe how experienced production and sales managers are likely to react to the new product costs. LO1,3,4 4-43 Activity-based costing, service department allocations, activity-based management The Fishburn plant of Hibeem Electronics Corporation makes two types of wafers 181 Chapter 4 Activity-Based Cost Systems ities Cases LO 1, 3, 4, 5, 10 4-42 Comparison of two costing systems, activity-based management Redwood City plant of Crimson Components Company makes two types of rotators for auto e bile engines: R361 and R572. The old cost accounting system at the plant traced support costs: four cost pools: Cost POOL SUPPORT COSTS COST DRIVER S1 S2 P1 P2 Direct labor cost Machine hours $1,176,000 1,120,000 480,000 780,000 $3,556,000 Pool S1 included service activity costs related to setups, production scheduling, plant adm- istration, janitorial services, materials handling, and shipping. Pool S2 included activity coss related to machine maintenance and repair, rent, insurance, power, and utilities. Pools P1 and ? included supervisors' wages, idle time, and indirect materials for the two production departmens casting and machining, respectively. The old accounting system allocated support costs in pools S1 and 52 to the two production departments using direct labor cost and machine hours, respectively, as the cost drivers. Then the accumulated support costs in pools P1 and P2 were applied to the products on the basis of dires labor hours. A separate rate was determined for each of the two production departments. The direct labor wage rate is $15 per hour in casting and $18 per hour in machining. 180 Chapter 4 Activity-Based Cost Systems OBECT LABOR HOURS (QUI R361 R572 TOTAL DEPARTMENT Casting (P1) Machining (P2) Total 60,000 72,000 132,000 20,000 48,000 68,000 80,000 120,000 200,000 DIRECT LABOR COSTS $1,200,000 2,160,000 $3.360.000 MACHINE HOURS (MH) R572 TOTAL DEPARTMENT Casting (Pi) Machining (P2) Total R361 30,000 72.000 102,000 10,000 48,000 58,000 40,000 120,000 160,000 R361 R572 ITEM Sales price per unit Sales and production units Number of orders Number of setups Materials cost per unit $19 500,000 1,000 2,000 $8 $20 400,000 1,000 4,000 $10 Now the plant has implemented an activity-based costing system. The following table presents the amounts from the old cost pools that are traced to each of the new activity cost pools: OLD COST Pools S2 P1 12 ACTIVITY COST DRIVERS P1-DLH P2-DLH Setup hours P1-MH P2-MH Total 51 $120,000 240,000 816,000 0 0 $1,176,000 $0 0 80,000 260,000 780,000 $1,120,000 $120,000 0 240,000 120,000 0 $480,000 $0 120,000 540,000 0 120,000 5780,000 TOTAL $240,000 360,000 1,676,000 380,000 900,000 $3,556,000 Setups for R572 are 50% more complex than those for R361; that is, each R572 setup takes 1.5 times as long as one R361 setup. Required a. Determine the product costs per unit using the old system. Show all intermediate steps for allocations, including departmental cost driver rates and a breakdown of product costs into each of their components. b. Determine the product costs per unit using the new system. c. Explain the intuitive reason that the product costs differ under the two accounting systems. d. What should Crimson Components do to improve the profitability of its Redwood City plant? Include marketing and product-related changes among your recommendations. e. Describe how experienced production and sales managers are likely to react to the new product costs. LO1,3,4 4-43 Activity-based costing, service department allocations, activity-based management The Fishburn plant of Hibeem Electronics Corporation makes two types of wafers 181 Chapter 4 Activity-Based Cost Systems