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Knickknack, Incorporated, 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
Knickknack, Incorporated, 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: Items Odds Ends Production quantity 1,080 units 5,800 units Direct material $ 40 Direct labor (not including setup time) 30 (2 hour at $15) 45 (3 hour at $15) Manufacturing overhead 96 (2 hour at $48) 144 (3 hour at 148) Total cost per unit $ 166 $ 249 Calculation of predetermined overhead rate: Manufacturing overhead budget: Machine-related costs $ 450, 808 Setup and inspection 180, 808 Engineering 90, 2ge Plant-related costs 96, 208 Total $ 816, 090 Predetermined overhead rate: Budgeted manufacturing overhead / Budgeted direct-labor hours = $816,000 / ((1,000)(2) + (5,000)(3)) = $48 per direct- abor hour Knickknack, Incorporated, 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 Cost Driver Budgeted Level of Cost Driver Machine-related costs Machine hours 9, 080 hour Setup and inspection Number of production runs 49 runs Engineering Engineering change orders change orders Plant-related costs Square footage of space 1, 920 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. For each activity cost pool, compute a pool rate. (Hint: Regarding the pool rate. refer to Exhibit 5-6.) 5. Using the same pricing policy as in the past, compute prices for Odds and Ends. Use the product costs determined by the ABC system. Note: Round your Intermediate calculations and final answers to 2 decimal places. Answer is complete and correct. Odds Ends New target prices
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