Requirement #1 ? Using Activity Based Costing to determine the cost per product.

a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related

overhead and the other overhead amounts.

b.) Use the rates you calculated in part a to calculate the total overhead applied to each

product. (You should use the activities in Exhibit 5. Where activity numbers have

been provided use the actual activity amounts not their percentages as the case

writers have rounded their percentages. For example use the number of transactions

4 + 25 + 100 = 129 transactions not 3% + 19% + 78%)

c.) Don?t forget to use the Material, Set up labor, and Direct labor, costs provided for

each product in Exhibit 4.

Requirement

Destin Brass Products Harvard Business School Case #190-089 Case Software #XLS024 Copyright 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording or otherwisewithout the permission of Harvard Business School. Exhibit 1 Product Profitability Analysis Valves Standard unit costs Target selling price Planned gross margin (%) Last Month Actual selling price Actual gross margin Pumps Flow Controllers $37.56 $57.78 35% $63.12 $97.10 35% $56.50 $86.96 35% $57.78 35% $81.26 22% $97.07 42% Exhibit 2 Monthly Product and Cost Summary Product Lines Valves Pumps Flow Controllers Monthly production 7,500 units (1 run) 7,500 units (1 shipment) 12,500 units (5 runs) 12,500 units (7 shipments) 4,000 units (10 runs) 4,000 units (22 shipments) Monthly shipments Manufacturing Costs Material Total material Labor ($16 per hour including employee benefits) Set-up labor Run labor Machine usage Monthly Total 4 components 2 @ $2 = $ 4 2 @ 6 = 12 16 5 components 3 @ $2 = $ 6 2 @ 7 = 14 $20 10 components 4 @ $1 = $ 4 5 @ 2 = 10 1@8=8 $22 8 hours per production run .25 hours per unit .50 hours per unit 8 hours per production run .50 hours per unit .50 hours per unit 12 hours per production run .40 hours per unit .20 hours per unit $458,000 168 hours 9,725 hours 10,800 hours Manufacturing Overhead Receiving Materials handling Engineering Packing and shipping Maintenance Total Machine depreciation (units-of-production method) $25 per hour of use $20,000 200,000 100,000 60,000 30,000 $410,000 $270,000 Exhibit 3 Standard Unit Costs Valves Material Direct labor Overhead @ 439% ofdirect labor $ Standard unit cost Overhead Machine depreciation Set-up labor Receiving Materials handling Engineering Packing and shipping Maintenance Pumps Flow Controllers $16.00 4.00 17.56 $20.00 8.00 35.12 $22.00 6.40 28.10 $37.56 $63.12 $56.50 $270,000 2,688 20,000 200,000 100,000 60,000 30,000 $682,688 Total run labor = 9,725 hours $16 = $155,600 Overhead rate 682,688 = 439% 155,600 Exhibit 4 Revised Unit Costs Valves Pumps Flow Controllers Material $16.00 $20.00 Material overhead (48%) 7.68 9.60 Set-up labor 0.02 0.05 Direct labor 4.00 8.00 Other overhead (machine hour basis) 21.30 21.30 Revised standard cost $49.00 $58.95 Material Related Overhead Receiving 20,000 Materials handling 200,000 Total $220,000 Overhead Absorption Rate $220,000 = 48% (materials cost basis) $458,000 Other Overhead Machine depreciation $270,000 Engineering 100,000 Packing and shipping 60,000 Maintenance 30,000 Total $460,000 Overhead Absorption Rate $460,000 = $42.59 per machine hour 10,800 hours $22.00 10.56 0.48 6.40 8.52 $47.96 Exhibit 5 Monthly Overhead Cost Activity Analysis Valves Pumps Flow Controllers 4 transactions (3%) 4 transactions (3%) 25 transactions (19%) 25 transactions (19%) 100 transactions (78%) 100 transactions (78%) 1 transaction (3%) 7 transactions (23%) 22 transactions (73%) 20% 30% 50% 3,750 hours (35%) 6,250 hours (58%) 800 hours (7%) Receiving and Materials Handling: Receive each component once per run Handle each component once per run Packing and Shipping: One packing order per shipment Engineering: Estimated engineering work-order percentage (subjective) Maintenance: Machine-hour basis Using ABC Activity Activity Cost Pool Activity Rate Cost Driver