Required:
In a memo, please respond to Alan, president of BBCC, on the following issues:
Activity-basedcosting
Have an activity-based costing analysis of each product (The-Bar, Alamonde and Salt-Lick) using the information provided from Exhibit 6 and the 20X7 actual costs incurred (Exhibit 4). The analysis should consist of a partial income statement showing sales and manufacturing costs (including direct materials and direct labour) for each product, including revised gross margin and gross margin percentage. Because the change in beginning and ending work-in-process and finished goods inventory amounts are negligible, these figures can be omitted from this analysis.
Discuss the results achieved above and explain why the gross margin(s) have changed. Finally, discuss how the activity-based approach provides a better allocation of costs and a more reliable gross margin.
Exhibit 6 A consultant was hired last year to determine the cost pools of all company processes, but the information was never used to perform an activity-based costing analysis because of lack of time. What is needed is an activity-based analysis of current overhead allocations, and a proper cost of goods manufactured schedule. Below are the consultant's planning notes. Planning notes: Activity-based costing project - 20X6 TO: Alan, President, Boston Bar Chocolate Company FROM: Solomon, ABC consultant RE: Activity-based costing project Thank you for giving me the opportunity to develop an activity-based costing approach for your product lines. The following is a summary of my findings. After viewing production processes and interviewing staff in operations, the following activity pools and the activity drivers were determined to adequately define the basic steps in the production line: Activity Activity driver Scheduling production runs Number of production runs Machine setup Setup hours Product administration Number of product lines Machine operations Machine hours Inspection Number of inspections Research and development R&D hours Plant lease Currently, your manufacturing overhead accounts consist of the following: plant utilities plant maintenance . . quality control computer and supplies . . plant equipment amortization research and development . . . plant salary and wages (indirect) plant lease The balance in all of these accounts can be allocated to the three products using an activity-based approach except for the plant lease which is a facility-sustaining cost.The following are some key points to consider when allocating costs: Indirect labour is split between the following activities: 0 45% for cleaning, preparing, and setting up machines for batch runs 0 55% to scheduling production runs. This includes purchasing and releasing materials for production and scheduling production. Setup time for batches of The-Bar is the shortest at about one hour. The setup for the Alamonde bar takes longer (about three hours) because the particulate equipment has to be set up and tested in order to add almonds to the mix. The setup for the Salt-Lick bar takes the longest (about four hours) because the salt sprinkling machine must be set up and properly tested for correct temperature before the production run. Quality control is responsible for ensuring that the nished product achieves strict standards set out by the research department. Depending on the product, inspections are made at dierent stages of the process. Because it has no special additions, The-Bar is tested only at the rening stage and at the nished stage. In addition to these inspections, Alamonde is inspected after the particulate is added and Salt-Lick is inspected aer the salt granules are added. All lab testing labour and supplies are currently allocated to the quality control account using the normal costing system. After interviewing the systems administrator, it was discovered that most of the computer's time and supplies expense is used to schedule production runs in the factory and to order and pay for the materials required in each production run (approximately 80%). The remaining 20% of computer expense is allocated to keeping records of the three products and their production, so it would fall under product administration. Research and development activities are currently concentrated on improving the avour and consistency of the particulates and salt added to the bars. Approximately 525 hours have been spent on researching a variety of ways that could possibly achieve this goal. As The-Bar does not contain any additional particulates, this cost is allocated to Alamonde and Salt-Lick based on research hours for each. Plant utilities, plant maintenance, and plant equipment amortization are incurred to supply machine time as part of machine operation to produce chocolate bars. Production cost pools and related activities based on 20x7 production Activity The-Bar Alamonde Salt-Lick Total Production volume (bars)* 776,000 528,000 302,500 1,606,500 Batch size (bars) 4,000 3,000 2,500 Machine hours per batch 13.0 18.0 19.0 Number of annual production runs 194 176 121 491 (batches) Number of inspections per batch 2 3 3 Setup time (hours) 1 3 4 Number of product lines 1 1 1 Research and development hours 75 450 525 *Due to stable inventory levels, it is assumed that sales equal production. Budgeted direct labour For the year ended December 31, 20X7 The-Bar Alamonde Salt-Lick Total Direct labour hours 4,560 3,140 1.790 9,490 Cost per labour hour 5 32.40 5 32.40 5 32.40 5 32.40 Total budgeted direct labour cost $ 147,744 $ 101,736 $ 57,996 $ 307,476 Actual manufacturing overhead For the year ended December 31 , 20X? Variable Plant utilities 5 103,584 Plant maintenance 89,566 $ 193,150 Fixed Quality control $ 37,500 Computer and supplies 188,000 Plant and equipment amortization 150,000 Research and development 135,000 Indirect plant salary and wages 193,000 Plant lease 196,000 899,500 Total manufacturing overhead 3 1,092,650 Budgeted manufacturing overhead For the year ended December 31, 20x7 Variable Plant utilities $ 101,876 Plant maintenance 91,081 $ 192,957 Fixed Quality control $ 39,000 Computer and supplies 189,000 Plant and equipment amortization 150,000 Research and development 120,000 Indirect plant salary and wages 192,500 Plant lease 196,000 886,500 Total manufacturing overhead 5 1,079,457 Predetermined overhead rate = $1 ,079,457/9,490 direct labour hours = $113.74678 per direct labour hour One of the cost issues faced by the company is understanding what the variable costs are and what the xed costs are. The manufacturing overhead schedule shows plant utilities as a purely variable cost yet even with no machinery running, the company gets a bill. 30, a study was conducted on the plant utilities costs compared to direct machine hours. The information is provided below
