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Oriole Manufacturing produces two products in its Saratoga plant, balzene and galvene. Since it opened its doors in 1965, Oriole has been using a
Oriole Manufacturing produces two products in its Saratoga plant, balzene and galvene. Since it opened its doors in 1965, Oriole has been using a single manufacturing overhead pool to accumulate overhead costs. Overhead has been allocated to products based on direct labor hours. Until recently, Oriole was the sole producer of galvene in the country and was therefore able to dictate the selling price. However, last year Marcella Products began marketing a comparable product at $59 per unit-a price that is below Oriole's product cost. Oriole's market share of galvene has declined rapidly as a result. The company's managers must now decide whether to meet the competitive price or discontinue the product. Oriole's cost accountant has suggested that the company do an activity-based cost analysis before managers make the decision The two main indirect costs of manufacturing balzene and galvene are power usage and setup costs. Most of the power usage occurs in the fabricating department; most of the setup costs are incurred in the assembly department. Setup costs are incurred predominantly in the production of balzene. The fabricating department has identified machine hours as the appropriate cost driver; the assembly department has identified setups as the appropriate cost driver. Direct labor rates are the same in both departments.
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