LASES Casnr In30 r h Activity-Based Costing, Distorted Product Costs OB Paper Inc has three paper mills one of which is located in Memphis, Tennessee. The produces 300 different types of coated and uncoated specialty printing papers. was convinced thar the value of the large variety of products more than offiet the mill Management extra costs of the increased During 20X1,the Memphis mil produced 120.000 tons of coared paper and $0,000 tons paper. Of the 200,000 tons produced, 180,000 were sold. Sixty products account for 80% of the tons sold. Thus, 240 products are classified as low-volume products. ht lime hopsack in cartons (LLHC) is one of the low-volume products. LLHC is s, converted into shects of paper, and then sold in cartons. In 20X1, the cost to produce and sell one t on of LLHC was as follows: Direct materials: Furnish (3 different palps) Additives (11 different items) Tub size Recycled scrap paper Total direct materials 2.225 pounds 200 pounds 75 pounds (296 pounds) S 450 500 10 (20) $ 940 450 Direct labor Overhcad: Paper machine (S100 per ton x 2.500 pounds) S 125 150 s 275 30 $1,695 Finishing machine ($120 per ton x 2.500 pounds) Total overhead Total manufacturing and selling cot Overhead is applied by using a two-stage process First, overhead is allocated to the finishing machines by using the direct method of allocation with careful Second, the overhead assigned to each machine is divided by the rates are then multiplied by the number of pounds required to selected cost drivers. budgeted tons of output. These produce one good ton. ton, making it one of the most profitable products. A In 20X1, LLHC sold for $2.400 similar examination of some of the other low.volume respectable profit margins. Unfortunately, the performance of the high-wolume p per products revealed that they also had was showing losses or very low profit margins. This situation led Ryan Chesser to call a mecting with his marketing vice president, Jennifer ler, Kaylin Penn. Ryan: The above-average profitability of our low-yolume performance of our high-volume products make me believe that we should ucts and the poor profit switch our market- drop some of our high wolume prod- ucts, particularly those showing a loss. lennifer: I'm not convinced that solution is the right one. I know our are of high quality, and I'm convinced that we are as efficient in our I think that somehow our warchousing costs are assigned by dividing these costs by the total tons of Kaylin: Jennifer, I hate to disagree, but the $30-per-ton charge for shipping and secems reasonable. I know that our method to assign paper companies. production as other firms. costs are not being assigned correctly. For example, the shipping and paper sold. Yet. these costs is identical to a number of other
