Knicknack Problem:

Knicknack, Inc.Knicknack, Inc. manufactures two products: odds and ends. The firm uses a single, plant wide OH rate based on DL hours.

Production and product-costing data are as follows:

Odds Ends

Production quantity 1,000 5,000

DM $160 $240

DL(not including set-up time) 120 (4 hr @ $30) 180 (6 hr @ $30)

MOH 384 (4 hr @ $96) 576 (6 hr @ $96)

Total cost per unit $664 $996

MOH budget

Machine-related costs $1,800,000

Setup and inspection 720,000

Engineering 360,000

Plant-related costs 384,000

Total $3,264,000

Knicknack, Inc. prices its products at 120% of cost, which yields target prices of $796.80 for odds and $1,195.20 for ends. Recently, however, Knicknack 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 $880 each. Knicknack's president is puzzled by Bricabrac's ability to sell ends at such a low cost.She has asked you to look into the matter. You have decided that Knicknack's traditional volume-based product-costing system may be causing the distortion between the firm's two products. Ends are a high-volume, relatively simply product. Odds, on the other hand, are quite complex and exhibit a much lower volume. You will try ABC.

1. Let each of the OH categories in the budget represent an activity pool.

2. The following cost drivers have been identified for the four activity cost pools.

Act Cost Pool Cost Driver Budgeted Level

Machine-related costs Machine hours 18,000 hours

Setup and inspection # of production runs 80 runs

Engineering Eng. change orders 200 change orders

Plant-related costs Square footage 3,840 sq. ft.

You have gathered the following information:

1. Each odd requires 8 machine hours, whereas each end requires 2 machine hours.

2. Odds are manufactured in production runs of 25 units each. Ends are in 125 unit batches.

3. 3/4 of the engineering activities, as measured by change orders, is related to odds.

4. The plant has 3,840 sq. ft. of space, 80% of which is used in the production of odds.

Required:

1. Determine the unit cost, for each activity pool, for odds and ends

2. Compute the new product cost per unit for odds and ends by using ABC

3. Show how the price was distorted under the traditional system