Operating each academic program that arise between the traditional costing approach and ABC. 21 CASE 726 Activity-Based Costing and Pricing [LO2, LO3, L04, L05] Oxford Concrete Inc. (OCI) processes and distributes various types of cement. The company buys quar- ried local rock, limestone, and clay from around the world and mixes, blends, and packages the pro- cessed cement for resale. OCI offers a large variety of cement types that it sells in one-kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the cement is raw materials. However, the company's predominantly automated mixing, blending, and packaging processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of OCI's cement mixtures are very popular and sell in large volumes, while a few of the re- cently introduced cement mixtures sell in very low volumes. OCI prices its cements at manufacturing cost plus a 25% markup, with some adjustments made to keep the company's prices competitive. For the coming year, OCI's budget includes estimated manufacturing overhead cost of $4,400,000. OCI assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materi- als (mostly quarried rock, limestone, and clay) during the year. The expected costs for direct materials and direct labour for one-kilogram bags of two of the com- pany's cement products appear below: Normal Portland High Sulphate Resistance Direct materials. ... Direct labour (0.02 hours per bag) .. $9.00 $0.24 $5.80 $0.24 OCI's controller believes that the company's traditional costing system may be providing misleading cost information. To determine whether this is the case, the controller has prepared 11 AL Chapter 7 Activity-Based Costing: A Tool to Aid Decision Making an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool Activity Measure Expected Activity for the Year Expected Cost for the Year Purchasing...... Materials handling Quality control Mixing. Purchase orders Number of setups Number of batches Mixing-hours Blending-hours Packaging hours 4,000 orders 2,000 setups 1,000 batches 190,000 mixing-hours 64,000 blending-hours 48.000 packaging hours $1,120,000 386,000 180,000 2,090,000 384,000 240,000 Blending Packaging Total manufacturing overhead cost..... $4,400,000 Data regarding the expected production of Normal Portland and Iligh Sulphatc Resistance cement mixcs are presented below: Normal Portland High Sulphate Resistance Expected sales.... Batch size ..... Setups .. Purchase order size.. Mixing time per 100 kilograms.. 160,000 kilograms 10,000 kilograms 4 per batch 20,000 kilograms 3 mixing-hours 8.000 kilograms 500 kilograms 4 per batch 500 kilograms 3 mixing-hours 27.78 x 36.06 in Normal Portland High Sulphate Resistance Expected sales..... Batch size ........ Setups ....... Purchase order size ..... Mixing time per 100 kilograms. Blending time per 100 kilograms .... Packaging time per 100 kilograms ... 160,000 kilograms 10,000 kilograms 4 per batch 20,000 kilograms 3 mixing-hours I blending-hour 0.6 packaging-hours 8,000 kilograms 500 kilograms 4 per batch 500 kilograms 3 mixing-hours 1 blending-hour 0.6 packaging-hours Required: 1. Using direct labour-hours as the base for assigning manufacturing overhead cost to products, do the following: a. Determine the predetermined overhead rate that will be used during the year. b. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilogram of the High Sulphate Resistance cement. 2. Using ABC as the basis for assigning manufacturing overhead cost to products, do the following: a. Determine the total amount of manufacturing overhead cost assigned to the Normal Portland cement and to the High Sulphate Resistance cement for the year. Using the data developed in 2(a) above, compute the amount of manufacturing overhead cost per kilogram of the Normal Portland cement and the High Sulphate Resistance cement. Round all computations to the nearest whole cent. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilo- gram of the Higli Sulphate Resistance cement. Write a brief memo to the president of OCI explaining what you found in (1) and (2) above, and discuss the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products. C. 27.78 x 36.06 in
