Louisiana Manufacturing Corporation ABC Case ana Manufacturing Corporation has a plant that produces two related products: Product A; Product B. Product A is the basic model while Product B is the deluxe model. The production process for each product is similar; consequently, the two products share the usage of production resources such as direct labor and production machinery. Production occurs in production runs. Quality testing of each production run occurs in the production department. During 2017, the company produced 8,000 units of Product A and 2,000 units of Product B. There were no incomplete units. Manufacturing costs per unit for each product appear below: Product A $11 Product B $11 14 Direct Materials Direct Labor Manuf. Overhead Total Manuf. 35 $60 S70 The financial accounting system reveals the following information at year end regarding manufacturing overhead (MOH): $ 50,000 depreciation, production machinery 20,000 plant electric 160,000 engineer wages 120,000 indirect labor $ 350,000 total Management currently allocates overhead costs (actual cost approach) based upon number of units produced. The allocation rate for 2017: $35 MOH per unit $350,000 actual MOH 10,000 total units produced Traditionally, the company prices its products by marking up manufacturing cost 30% to cover selling and administration costs and provide a profit to the stockholders. For Product A, the sales price was $78 per unit ($60 manuf cost * 130%), while for Product B, the sales price was $91 per unit ($70 manuf cost * 130%). Profitability analysis (in dollars per output unit): A B $78 $91 25 35 Sales price Less: direct manuf costs MOH Total manuf costs Gross profit The Vice President of Marketing notes that new competitors have recently entered the marketplace for the products. (Previously, competition was minimal). While company sales of Product B remain very strong, customer demand for Product A is weakening. For Product A, of the 8,000 units produced in 2017, over one thousand units were unsold at year end. The Vice President believes that, regarding Product A, the company is losing market share because competitors are selling at a lower price. The Controller suspects that product costs may be inaccurate which would lead to poor pricing decisions. The Controller hires an ABC consultant who discovers the following information about the overhead costs: On average, production of Product A requires 1.5 hours of machine time per output unit while Product B requires 2 hours per output unit. * $50,000 depreciation consists of $40,000 depreciation on production machinery and $10,000 depreciation on quality testing equipment. * $20,000 plant electric consists primarily of electric charges for running production machinery. The primary task of the engineers is to change machine settings for each production run. Indirect labor costs include the salary of the production supervisor, $50,000 per year. Indirect labor also includes the wages of quality testing personnel who inspect each production run ($70,000 per year). Personnel inspect by testing one randomly selected unit from each production run. During the year, Product A and Product B each had 100 production runs. Required Recalculate manufacturing costs per unit using ABC. Form three cost pools for MOH: production machine related costs; direct labor related costs, and production run related costs. Summary of ABC cost assignment Machine related costs Labor related costs Production run related costs Total MOH costs $ 45,000 35,000 120.000 $200,000 $ 15,000 15,000 120.000 $150,000 Number of Units 8,000 2,000 MOH cost per unit Direct manuf cost per unit Total manuf cost per unit $ 25.00 25.00 $50.00 $ 75.00 35.00 $110.00
