Precision Ltd. (PL) is a private company that manufactures circular saw blades. Caroline Reynolds, the president, is concerned that PL has been losing its market share, and its operating results are deteriorating. You, CPA, have been contracted to help PL resolve the production and sales issues it is currently experiencing.

In the initial phase of the engagement, you begin by reviewing budgeted costs and the cost allocations used by PL. In your review of direct manufacturing costs, you note that PL has recently upgraded to computer-aided manufacturing equipment that has virtually eliminated waste and spoiled units. As a result, direct labour costs have been cut by 20% per year over the last five years. Caroline doesn't think it is possible to reduce costs any further.

Caroline provided you with the standard cost report (Appendix I) that was drafted when planning for the current year's budget. This report explains how PL currently allocates overhead costs.

Task #1

PL currently allocates non-direct costs to product lines based on a variety of drivers (Appendix I). Caroline would like you to evaluate the current allocations and advise whether or not they are appropriate. Using your recommendations, provide the updated full cost per unit for each product line.

Appendix I Precision Ltd. Standard cost summary Coarse Fine Diamond Grade Grade Tip Standard unit costs: Direct materials $1.25 $ 2.25 $ 3.75 Direct labour 0.75 0.90 0.80 Overhead (Note 1) 8.25 9.90 8.80 Total manufacturing costs 10.25 13.05 13.35 Variable selling and administrative costs (Note 2) 0.35 0.55 1.10 Fixed selling and administrative costs (Note 3) 0.31 0.39 0.40 Full cost per unit $10.91 $13.99 $14.85 Labour hours per unit 0.04 0.05 0.06 Machine hours per unit 0.25 0.25 1.00 Unit sales 90,000 330,000 70,000 Selling price per unit $11.00 $14.50 $25.00 Notes: 1. Manufacturing overhead is allocated to products at a predetermined rate based on direct labour in dollars Budgeted overhead = $4,625,500* Budgeted direct labour $420,500 $11.00 per dollar of direct labour hour cost *90% of total overhead is composed of depreciation, regular machine maintenance, related salaries, and other fixed manufacturing costs. The remaining 10% of overhead costs is variable and includes the costs of operating the machines. 2. Variable selling and administrative costs consist entirely of sales commissions. Commission amounts per unit were negotiated with the salespeople two years ago. 3. Fixed selling and administrative costs are allocated to products at a predetermined rate based on total manufacturing costs. Budgeted fixed selling and administrative costs = $187,600 Budgeted total manufacturing costs $6, 163,500 = 3% of manufacturing costs