knickknack Inc. prices its products at 120% of costs which is target prices of one 199.20 of odds and 298.80ends. Recently however knickknack has been challenged in the market for and by the European competitor Bricabrac Corpration. A new interest in the market Bricabrac has been selling ends for $220 each knickknack president is puzzled by the Bricabrac ability to sale ends at such a low cost she has asked you to the controller to look into the matter you have decided that knickknack traditional volume based product costing system may be causing cost distortion between the farms to products in our a high-volume relatively simple product as on the other hand are quite complex in exhibit a much lower volume as a result you have begun work on the activity cost based system.

! Required information Problem 5-57 Activity-Based Costing; Activity Cost Pools; Pool Rates; Calculation of Product Costs; Cost Distortion (LO 5-1, 5-2,5-3,5-4,5-5) (The following information applies to the questions displayed below.) Knickknack, Inc. manufactures two products: Odds and Ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows: Odds Ends Production quantity 1,000 units 5,000 units Direct material 40 $ 60 Direct labor (not including setup time) 30 (2 hr. at $15) 45 (3 hr. at $15) Manufacturing overhead 96 (2 hr. at $48) 144 (3 hr. at $48) Total cost per unit $ 166 $ 249 Manufacturing overhead budget: Machine-related costs Setup and inspection Engineering Plant-related costs Total $450,000 180,000 90,000 96,000 5816,000 Predetermined overhead rate: Prev of 15 !!! Next > Problems Saved Budgeted manufacturing overhead Budgeted direct-labor hours $816,000 (1,000) (2) + (5,000) (3) - $48 per direct-labor hour Knick knack, Inc. prices its products at 120 percent of cost, which yields target prices of $199.20 for Odds and $298.80 for Ends. Recently, however, Knickknack has been challenged in the market for Ends by a European competitor, Bricabrac Corporation. A new entrant in this market, Bricabrac has been selling Ends for $220 each. Knickknack's president is puzzled by Bricabrac's ability to sell Ends at such a low cost. She has asked you (the controller) to look into the matter. You have decided that Knickknack's traditional, volume-based product-costing system may be causing cost distortion between the firm's two products. Ends are a high-volume, relatively simple product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system. Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Cost Driver Machine hours Number of production runs Engineering change orders Square footage of space Budgeted level of cost Driver 9,000 hr. 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: Each odd requires 4 machine hours, whereas each end requires 1 machine hour Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. The plant hos 1,920 square feet of space, 80 percent of which is used in the production of Odds . Problem 5-57 Part 2 Setup and inspection Engineering Plant-related costs Number of production runs Engineering change orders Square footage of space 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: Each odd requires 4 machine hours, whereas each end requires 1 machine hour. Odds are manufactured in production runs of 50 units each Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds. Problem 5-57 Part 2 2. For each activity cost pool, compute a pool rate. Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Pool Rate per machine hour per run per change order per square foot You have gathered the following additional information: Each odd requires 4 machine hours, whereas each end requires 1 machine hour. Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. . The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds. . Problem 5-57 Part 3 3. Determine the unit cost, for each activity cost pool, for Odds and Ends. (Round your intermediate calculations to 2 decimal places, Round "Engineering" and "Plant-related costs" to 2 decimal places.) Odds Ends Machine-related costs Setup and inspection Engineering Plant-related costs -p Two Problems A Saved Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Cost Driver Machine hours Number of production runs Engineering change orders Square footage of space Budgeted level of Cost Driver 9,000 hr. 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: . Each odd requires 4 machine hours, whereas each end requires 1 machine hour. Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds. . Problem 5-57 Part 4 4. Compute the new product cost per unit for Odds and Ends, using the ABC system. (Round your intermediate calculation answers to 2 decimal places.) Odds Ends Total cost per unit Two Problems Saved Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Cost Driver Machine hours Number of production runs Engineering change orders Square footage of space Budgeted Level of Cost Driver 9,000 hr. 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: Each odd requires 4 machine hours, whereas each end requires 1 machine hour. Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds. Problem 5-57 Part 5 5. Using the same pricing policy as in the past, compute prices for Odds and Ends. Use the product costs determined b system. (Round your intermediate calculations and final answers to 2 decimal places.) Odds Ends New target prices ep Two Problems A Seved Activity Cost Pool Machine-related costs Setup and inspection Engineering Plant-related costs Cost Driver Machine hours Number of production runs Engineering change orders Square footage of space Driver 9,890 hr. 40 runs 100 change orders 1,920 sq. ft. You have gathered the following additional information: Each odd requires 4 machine hours, whereas each end requires 1 machine hour. Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches. Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds. The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds. Problem 5-57 Part 7 7. Calculate the total amount of product cost distortion for entire product line caused by Knickknack's traditional, volume-based costing system (Round your intermediate calculations to 2 decimal places. Negative amount should be indicated by a minus sign.) Odds Ends Total amount of cost distortion