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Cost Information From Instructions

Stick

Collapsible

Units Sold

60,000

3,000

Selling Price

$12.50

$14.00

Direct Material Cost Per Unit

$3.00

$3.10

Direct Labor Cost Per Hour

$7.50

$8.00

Variable MO

$0.40

$0.40

Variable Selling Costs

$1.10

$1.10

Labor Hours Per Unit

0.2

0.2

Sales Orders

120

1

Purchase Orders

50

3

Production Runs

45

6

Material Moves

86

10

Machine Setups

130

6

Machine Hours

525

32

Inspections

200

10

Shipments

60

3

Activity Information from Instructions

Activity

Activity Cost

Activity Cost Driver

Order Processing

$35,000

Number of Sales Orders

Purchasing

$36,000

Number of Purchase Orders

Material Handing

$28,000

Material Moves

Machine Setup

$14,000

Machine Setups

Production

$99,000

Production Runs

Assembly

$80,000

Machine Hours

Inspecting

$11,000

Number of Inspections

Shipping

$7,500

Number of Shipments

Requirement 1

Activity

Total Costs

Quantity of Cost Allocation Base

Overhead Allocation Rate

Order Processing

$

X

$

Purchasing

$

X

$

Material Handing

$

X

$

Machine Setup

$

X

$

Production

$

X

$

Assembly

$

X

$

Inspecting

$

X

$

Shipping

$

X

$

Requirement 2

Traditional Costing

Stick Umbrella

Collapsible Umbrella

Total

Revenues

$

$

$

Direct Materials

$

$

$

Direct Labor

$

$

$

Variable Overhead

$

$

$

Variable Selling Costs

$

$

$

Allocated Fixed Overhead

$

$

$

Total Costs

$

$

$

Operating Income

$

$

$

Operating Income %

%

%

Per Unit Operating Income

$

$

Requirement 3

Activity-Based Costing

Stick Umbrella

Collapsible Umbrella

Total

Revenues

$

$

$

Direct Materials

$

$

$

Direct Labor

$

$

$

Variable Overhead

$

$

$

Variable Selling Costs

$

$

$

Order Processing Costs

$

$

$

Purchasing Costs

$

$

$

Material Handing Costs

$

$

$

Machine Setup Costs

$

$

$

Production Costs

$

$

$

Assembly Costs

$

$

$

Inspecting Costs

$

$

$

Shipping Costs

$

$

$

Total Costs

$

$

$

Operating Income

$

$

$

Operating Income %

%

%

Per Unit Operating Income

$

$

Requirement 4

Costs per Unit

Stick Umbrella

Collapsible Umbrella

Traditional

$

$

ABC

$

$

Difference

$

$

Requirement 5

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.