L017-6, L017-7 PROBLEM 17.8A

ABC versus Use of a Single

Activity Base

Healthy Hound, Inc., makes two lines of dog food: (1) Basic Chunks and (2) Custom Cuts. The Basic Chunks line is a dry food that is processed almost entirely by an automated process. Custom Cuts is a canned food made with real horsemeat. The slabs of meat are cut and trimmed by hand before being shoveled into an automated canning machine. Basic Chunks sells very well and is priced significantly below competitive brands. Sales of Custom Cuts have been on the decline, as the company has failed to keep the brand price competitive. Other information concerning each product line is provided as follows.

Number of units* produced and sold per month

Direct materials cost per unit

Direct labor cost per hour .

Direct labor hours per unit

*Units for Basic Chunks refer to bags; units for Custom Cuts refer to cases.

Basic Chunks Custom Cuts

50.000

$2

$12

0.01

20,000

$4

$12

0.10

The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $24,600, whereas budgeted direct labor hours amount to 2,500 per month.

Healthy Hound recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing over-head. She proposes that the following cost pools and cost drivers be used.

Cost Pool

Amount

Allocated Cost Driver

Total Driver

Volume

Utilities

Maintenance

Depreciation of plant and equipment

Miscellaneous

Total allocation

$ 8.000

Kilowatt-hours

1.000

Machine-hours

15,000

Square feet occupied

600

Direct labor hours

$24.600

100.000 kWh

200 mh

80,000 sq. ft.

2,500 DLH

The amount of driver activity corresponding to each product line is as follows.

Cost Driver

Basic Chunks Custom Cuts

Kilowatt-hours

Machine-hours

Square feet occupied

Direct labor hours ..

90.000 kWh

160 mh

60,000 sq. ft.

500 DLH

10.000 kWh

40 mh

20,000 sq. ft.

2.000 DLH

Instructions

a.

Allocate manufacturing overhead costs to each product line using direct labor hours as a sin gle cost driver.

b.

Allocate manufacturing overhead costs to each product line using the activity-based costing approach recommended by the consultant.

C.

Compute the total monthly manufacturing costs assigned to each product line when activity-based costing is used to allocate manufacturing overhead.

d.

Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. On the basis of your results from parts a and b, discuss a possible reason why sales of the Custom Cuts product line are currently experiencing a decline

e.

Discuss reasons why the company should adopt the recommendation of the consultant and implement an activity-based costing system.

\begin{tabular}{l|l} LO17-6, LO17-7 & Healthy Hound, Inc., makes two lines of dog food: (1) Basic Chunks and (2) Custom Cuts. The \\ PROBLEM 17.8A & Basic Chunks line is a dry food that is processed almost entirely by an automated process. Custom \\ ABC versus Use of a Single & Cuts is a canned food made with real horsemeat. The slabs of meat are cut and trimmed by hand \\ before being shoveled into an automated canning machine. Basic Chunks sells very well and is \\ Activity Base & priced significantly below competitive brands. Sales of Custom Cuts have been on the decline, as \\ the company has failed to keep the brand price competitive. Other information concerning each \\ product line is provided as follows. \end{tabular} -Units for Basic Chunks refer to bogs; units for Custom Cuts refer to cases. The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $24,600, whereas budgeted direct labor hours amount to 2,500 per month. Healthy Hound recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing overhead. She proposes that the following cost pools and cost drivers be used. The amount of driver activity corresponding to each product line is as follows. Instructions a. Allocate manufacturing overhead costs to each product line using direct labor hours as a single cost driver. b. Allocate manufacturing overhead costs to each product line using the activity-based costing approach recommended by the consultant. c. Compute the total monthly manufacturing costs assigned to each product line when activitybased costing is used to allocate manufacturing overhead. d. Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. On the basis of your results from parts a and b, discuss a possible reason why sales of the Custom Cuts product line are currently experiencing a decline. e. Discuss reasons why the company should adopt the recommendation of the consultant and implement an activity-based costing system. \begin{tabular}{l|l} LO17-6, LO17-7 & Healthy Hound, Inc., makes two lines of dog food: (1) Basic Chunks and (2) Custom Cuts. The \\ PROBLEM 17.8A & Basic Chunks line is a dry food that is processed almost entirely by an automated process. Custom \\ ABC versus Use of a Single & Cuts is a canned food made with real horsemeat. The slabs of meat are cut and trimmed by hand \\ before being shoveled into an automated canning machine. Basic Chunks sells very well and is \\ Activity Base & priced significantly below competitive brands. Sales of Custom Cuts have been on the decline, as \\ the company has failed to keep the brand price competitive. Other information concerning each \\ product line is provided as follows. \end{tabular} -Units for Basic Chunks refer to bogs; units for Custom Cuts refer to cases. The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $24,600, whereas budgeted direct labor hours amount to 2,500 per month. Healthy Hound recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing overhead. She proposes that the following cost pools and cost drivers be used. The amount of driver activity corresponding to each product line is as follows. Instructions a. Allocate manufacturing overhead costs to each product line using direct labor hours as a single cost driver. b. Allocate manufacturing overhead costs to each product line using the activity-based costing approach recommended by the consultant. c. Compute the total monthly manufacturing costs assigned to each product line when activitybased costing is used to allocate manufacturing overhead. d. Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. On the basis of your results from parts a and b, discuss a possible reason why sales of the Custom Cuts product line are currently experiencing a decline. e. Discuss reasons why the company should adopt the recommendation of the consultant and implement an activity-based costing system