Question
Merry Dog Ltd makes two lines of dog food: (1) Tabby Treat, and (2) Fresh n Doggy. The Tabby Treat line is a dry food
Merry Dog Ltd makes two lines of dog food: (1) Tabby Treat, and (2) Fresh n Doggy. The Tabby Treat line is a dry food that is processed almost entirely by an automated process. Fresh n Doggy is a canned food made with real Australian lamb racks. Each lamb rack is cut by hand before being tossed into an automated grinding and canning machine. Tabby Treat sells very well and is priced significantly below competitive brands. Sales of Fresh n Doggy have been on the decline, as the company has failed to keep the brand price competitive. Other information concerning each product line is provided below:
Tabby Treat | Fresh n' Doggy | |
Number of units produced and sold per month | 75 000 | 48 000 |
Direct materials cost per unit | $1,00 | $3,00 |
Direct labor cost per hour | $16,00 | $16,00 |
Direct labor hours per unit | 0,04 | 0,25 |
The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $60000, whereas budgeted direct labor hours amount to 15000 per month.
Merry Dog Ltd recently hired a consultant to look at its cost accounting system. The consultant recommends that the company adopt ABC to allocate manufacturing overhead. He suggests that the following cost pools and cost drivers be used:
Cost Pool | Amount Allocated | Cost Driver | Total Driver Volume | ||
Utilities | $26 000 | Kilowatt-hours | 250 000 | kWh | |
Maintenance | $19 000 | Machine set-ups | 100 | set-ups | |
Depreciation of plant and equipment | $12 000 | Square feet occupied | 50 000 | sq. ft. | |
Miscellaneous | $3 000 | Direct labor hours | 15 000 | DLH | |
Total allocation | $60 000 |
The amount of driver activity corresponding to each product line is as follows:
Cost Driver | Tabby Treat | Fresh n' Doggy | Total Driver Volume | ||
Kilowatt-hours | 200 000 | 50 000 | 250 000 | kWh | |
Machine set-ups | 70 | 30 | 100 | set-ups | |
Square feet occupied | 42 000 | 8 000 | 50 000 | sq. ft. | |
Direct labor hours | 3 000 | 12 000 | 15 000 | DLH |
Work to be done:
- Allocate the budgeted manufacturing overhead costs to each product line using direct labor hours (DLH) as a single cost driver. 2pts
- Allocate the budgeted manufacturing overhead costs to each product line using the ABC approach recommended by the consultant. 8pts
- Compute the total monthly manufacturing costs assigned to each product line when ABC is used to allocate manufacturing overhead. 8pts
- Discuss 4 reasons why the company should adopt the recommendation of the consultant to implement an ABC system. 4pts
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