Required information

Problem 9-63 and 9-64 (Algo)

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Lauder Company manufactures and distributes various fixtures used primarily in new building construction. At the company's Bayside plant, Lauder produces two models of one widely used fixture designated by model names LC-20 and LC-50. Currently, the Bayside plant uses direct labor hours to allocate manufacturing overhead costs to products.

The vice presidentof manufacturing (VP-M) at Lauder has recently been considering updates to the company's costing systems as a way to ensure that managers have the best information available for decision-making. However, rather than update throughout the entire firm, the VP-M and CFO agreed to test an ABC system. Because of its size and focus, the Bayside plant was selected for the experiment. An ABC study team, consisting of both plant and corporate employees was formed to propose an ABC system and compare the product costs with those reported by the current system. Based on the experiment, the executives at Lauder will decide whether to roll out the new cost system to the entire company.

The study team identified four cost pools into which the manufacturing overhead costs could be grouped. There was a great deal of discussion about both the pools and the cost drivers. The final system selected consisted of the following pools and drivers. The costs were based on the forecasts for the coming year.

Cost Pools	Costs	Activity Drivers
Material inspection	$ 459,360	Direct material cost
Assembly	2,563,600	Machine-hours
Equipment setup	916,400	Production runs
Packaging and shipping	487,200	Units shipped

Data for the production of the two products at the Bayside plant for the coming year of operations follows:

	Products
LC-20	LC-50
Total direct material costs	$ 626,400	$ 208,800
Total direct labor costs	$ 487,200	$ 243,600
Total machine-hours	106,865	53,360
Total number of production runs	87	58
Number of units produced and shipped	278,400	69,600

All direct labor at the Bayside plant is paid $35 per hour.

Problem 9-64 (Algo) Activity-Based Costing and Predetermined Overhead Rates (LO 9-3, 5, 6)

Kensington Electronics (KE) is a wholly owned subsidiary of CWD Enterprises, a global manufacturing company. Unlike most CWD companies, KE uses a traditional costing system to compute product costs. After the last review by CWD staff, the financial management at KE decided to consider switching to activity-based costing. The controllers staff at KE has identified classified manufacturing overhead costs for the next quarter into four overhead cost pools. They also identified an appropriate cost driver for each pool.

Cost Pools	Costs	Activity Drivers
Production setup	$ 459,360	Production runs
Fabrication	2,563,600	Machine-hours
Certification	916,400	Certificates
Quality assurance	487,200	Test-hours

The company manufactures two basic products, which are components of navigation systems. The products are the NAV1 and NAV1-AV. Although similar, the NAV1-AV uses upgraded materials. In addition, the NAV1-AV needs to be certified for use in aircraft navigational equipment. All units produced are tested, but the tests are more extensive for the NAV1-AV model.

The following are data for production for the next quarter:

	Products
NAV1	NAV1-AV
Total direct material costs	$ 626,400	$ 208,800
Total direct labor costs	$ 487,200	$ 243,600
Total machine-hours	106,865	53,360
Total test hours	87	58
Total number of production runs	278,400	69,600
Number of certificates	35	1,922,700
Number of units produced and shipped	640,900	730,800

Required:

a. The current cost accounting system charges overhead to products based on machine hours. What unit product costs will be reported for the two products if the current cost system continues to be used?

b. What are the cost-driver rates for the four cost pools identified by the controller's staff?

d. What unit product costs will be reported for the three products if the ABC system proposed by the controller's staff is adopted?

e. How would the activities identified by the controller's staff be classified in terms of the levels of the cost hierarchy?

Complete this question by entering your answers in the tabs below.

• Req A1
• Req A2

Compute the totals of the cost driver rates shown below. Note: Round the Packaging and shipping" answer to 2 decimal places.

Material inspection		% of material dollars
Production		per hour
Engineering		per setup
Equipment setup		per setup
Packaging and shipping		per unit

What unit product costs will be reported for the two products if the revised ABC system is used?

Note: Do not round intermediate calculations.

	LC-20	LC-50
Direct material costs
Direct labor cost
Overhead:
Material inspection
Production
Engineering
Equipment setup
Packaging and shipping
Total costs	0	0
Number of units
Unit cost	0	0