The Rao Company is a publicly traded corporation that produces different types of air fryers.My name is Alan Smith and I have worked for this company for the last ten years in the controller's office.I was both an accounting and finance major in university.The company currently produces 300 products and does not anticipate any new products coming out over the next three years.I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional costing system (where overhead costs are allocated across products at a rate of 400% of direct labor costs) when different products require different amounts of indirect resources.For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs.Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs.Given that traditional costing systems may result in significant cost distortions when determining products costs and given that the firm now has revenues of over $100 million a year, Rao has decided to adopt activity based costing over the next year or two.

Rao's management has hired Deloitte Consulting to help us implement activity-based costing.I will be acting as the liaison between our firm and Deloitte.As part of the initial implementation phase, I have asked Deloitte to derive the costs and product margins associated with two of our products, Ole and Duo, so that these costs and product margins could be compared with the costs and profit margins under our current traditional costing system.I picked these products since Rao management believe they have very different demands on indirect overhead resources.Further, Ole is sold in large quantities whereas Duo is sold in small quantities.

Current information from our existing system on a per unit basis is shown in Exhibit 1.

AutoSave .0\" 'n' E (j v L5 : \"a Rao Case Q v Home Insert Draw Design Layout References Mailings Review View a Share a Comments X 'i'iriies New V' 12 v AA Av Aa v A :2 v i: v 1T " [E 0 ,_ AaBchDdEe AaBchm AaBchDdE AaBb( Aasbcwdze AaBchDdEe ) ' V Paste B I U V ab x x1 No Snacing Heading 1 Heading 2 Title Subtitle Subtle Emmi... Styles Sensitivity 6 2 Pane Rao Case ACBU 2223 Fall 2020 The Rao Company is a publicly traded corporation that produces different types of air fryers. My name is Alan Smith and I have worked for this company for the last ten years in the controller's ofcer I was both an accounting and nance major in university. The company currently produces 300 products and does not anticipate any new products coming out over the next three years. I have previously mentioned to my superiors that it is not appropriate for our rm to use a traditional costing system (where overhead costs are allocated across products at a rate of 400% of direct labor costs) when different products require different amounts of indirect resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs. Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs. Given that traditional costing systems may result in signicant cost distortions when determining products costs and given that the firm now has revenues of over $100 million a year, Rao has decided to adopt activig based costing over the next year or two. Rae's management has hired Deloitte Consulting to help us implement activity-based costing. I will be acting as the liaison between our rm and Deloitte. As part of the initial implementation phase, I have asked Deloitte to derive the costs and product margins associated with two of our products, Ole and Duo, so that these costs and product margins could be compared with the costs and prot margins under our current traditional costing system. I picked these products since Rao management believe they have very different demands on indirect overhead resources. Further, Q is sold in large quantities whereas Duo is sold in small quantities. Current information from our existing system on a per unit basis is shown in Exhibit 1. Exhibit 1 Ole Duo Direct material $38 $38 Direct labor hours 0.25 0.25 Direct labor cost per hour $36 $36 Sales price per unit $90.00 $95.00 -'F+ 136% Page 'I of 4 1241 words [5' English (United States) D Focus n 5% AutOSave .0\" 'n' E (j v L5 : : \"a Rae Case Q v Home Insert Draw Design Layout References Mailings Review View share GCDmments X ' ' ' " :: ;: V '3: V _ _ A [an \"E T'meSNeWM 4'12 V A A A3\" A0 -"= '2 2 2i '7 AaBchDdEe AaBchD( AaBchDdR AaBb( Aasbcwdze AaBchDdEe ) d 'V Paste 6 B I g V ab x, x1 A V p V A" g 15 V & V _ V NDSDacing Heading1 Headingz Title Subtitle SubtleEmph... sighs: Sensitivity Exhibit] Ole Duo Direct material $38 $38 Direct labor hours 0.25 0.25 Direct labor cost per hour $36 $36 Sales price per unit $90.00 $95.00 My staff has identied for Deloitte ve activity cost pools. Information on those cost pools and the related allocation bases are provided in Exhibit 2. Exhibit 2 Total Costs Allocation Base Level of Allocation Base Equipment setups $7,500,000 Number of setups 50,000 Purchase orders $10,800,000 number of purchase orders 180,000 Machining $105,000,000 number of machine hours 1,500,000 Testing $13,500,000 number of testing hours 900,000 Packaging $24,000,000 number of containers 1,200,000 Although xed costs are lumped in with variable costs across the ve different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, with respect to all questions asked in this case, machining costs will be treated as entirely xed with respect to machine hours. Each machine is used in the production of multiple product lines. The resale value of machines is only affected by the passage of time and not by how much l . . Page 1 of 4 1241 words [13 English (United States) El Focus a $51: E - + 136% AutoSave OFF w Rao Case Q Q v Home Insert Draw Design Layout References Mailings Review View Share Comments Times New... v 12 A" A Aa Ap T AaBbCcDdEe AaBbCcDdEe AaBbCcDc AaBbCcDdE AaBb( AaBbCCDdEc AaBbCcDdEe Paste B I Uvab x X A DAY Norma No Spacing Heading 1 Heading 2 Title Subtitle Subtle Emph Styles Sensitivity Pane 1. (20 Points) Calculate product margin for Ole and Duo using the traditional costing system where overhead is applied at a rate of 400% of direct labor costs. The amount of product margin should be on a total basis and then show the average product margin per unit using the following template for guidance: Ole Duo Sales $$$ $$$ Direct materials $$$ $$$ Direct labor $$$ $$$ Manufacturing overhead $$$ $$$ Cost of goods sold $$$ Product margin $$$ SSS $$$ Average product margin per unit $$$ $$$ 2. (20 Points) Calculate the five activity rates (predetermined overhead rates) under activity-based costing. 3. (30 Points) Calculate product margin for Ole and Duo using the activity-based costing system. The amount of product margin should be on a total basis and then show the average product margin per unit using the following template for guidance: Ole Duo Sales $$$ $$$ Direct materials $$$ $$$ Direct labor Page 2 of 4 1241 words LX English (United States) Focus E + 136%%AutoSave .0\" 'n' E (j v L5 : : \"a Rao Case Q v Home Insert Draw Design Layout References Mailings Review View 13 Share 9 Comments x Times New vl' 12 v A\" A\" Aa v A =2 v i: v '3: c E E Al 11 V [a , 0 - ,_ Z AaBchDdEe AaBchD( AaBchDdR AaBb( Aasbcwdze AaBchDdEe ) 1 V Paste B I U V ab x x1 A V p v A ., g t; V & V ,4: c No Snacing Heading1 Headingz Title Subtitle SnbtleEmphm styles Sensitivity g _ 2 _ b Pane (2. (20 Points) Calculate the ve activity rates (predetermined overhead rates) under activity-based costing. 8. (30 Points) Calculate product margin for Ole and Duo using the activity-based costing system. The amount of product margin should be on a total basis and then show the average product margin per unit using the following template for guidance: Ole Duo Sales $$$ $$$ Direct materials $$$ $$$ Direct labor $$$ $$$ Equipment Setups $$$ $$$ Purchase orders $$$ $$$ Machining $$$ $$$ Testing $$$ $$$ Packaging and shipping & E Total ABC Costs H m Product margin w Average product margin per unit $$$ $$$ 4. (10 Points) Assume next year that the activity rates (predetermined overhead rates) remain the same as you calculated in question (2). Assume that the demand for Ole is expected to increase signicantly. Consequently, the rm expects to produce more batches of Ole next year than this year and the rm plans to produce in batch sizes of 60 rather than 40. Calculate what the equipment setup cost per unit of Ole will be next year if it can be calculated. If it cannot be calculated, then explain in words why the equipment setup cost per unit of Ole cannot be determined in the absence of more information 6. (10 Points) Question 5 is independent of question 4. Next year, because of an expected increase in product demand, machine hours are expected to increase from 1,500,000 to 1,750,000. The company will not need any new machinery since the current machinery is highly underutilized. Also, the number of testing hours will increase from 900,000 to 1,000,000. Assume that these new levels of operations are within the rm's relevant range. Calculate what the activity rate for the cost pool of machining would be next year if it can be calculated. Also, calculate what the activity Page30f4 1241 words LI} English (United States) El Focus a $51: E - 'F + 136% AutoSave .0\" 'n' E (j v L5 : : \"a Rao Case Q v Home Insert Draw Design Layout References Mailings Review View a Share 9 Comments X Times New Vl' 12 v AA A\" Aa v A i: v i: v 1T V [a . 0 ,_ AaBchDdEe AaBchD( AaBchDdEt AaBb( Aasbcwdze AaBchDdEe ) d l V Paste 6 B I U V ab x, x1 No Spacing Heading1 Headingz Title Subtitle SubeeEmpn... Styles Sensitivity Pane 4. (10 Points) Assume next year that the activity rates (predetermined overhead rates) remain the same as you calculated in question (2). Assume that the demand for Ole is expected to increase signicantly. Consequently, the rm expects to produce more batches of Ole next year than this year and the rm plans to produce in batch sizes of 60 rather than 40. Calculate what the equipment setup cost per unit of Ole will be next year if it can be calculated. If it cannot be calculated, then explain in words why the equipment setup cost per unit of Ole cannot be determined in the absence of more information 6. (10 Points) Question 5 is independent of question 4. Next year, because of an expected increase in product demand, machine hours are expected to increase from 1,500,000 to 1,750,000. The company will not need any new machinery since the current machinery is highly underutilized. Also, the number of testing hours will increase from 900,000 to 1,000,000. Assume that these new levels of operations are within the rm's relevant range. Calculate what the activity rate for the cost pool of machining would be next year if it can be calculated. Also, calculate what the activity rate for the cost pool of testing would be next year if it can be calculated. If one or both rates cannot be calculated, then explain in words why the calculations cannot be determined in the absence of more information. 6. (10 Points) Question 6 is independent of questions 4 and 5. Assume that the two accounting systems discussed in the case are allowed under GAAP. If the income statement for last year was restated using activitybased costing, would the company's total net operating income under activity-based costing differ from the company's total net operating income under their traditional accounting system? Why? Page 30f4 1241 words '5' English (United States) D Focus n 5% - \" + 136% AutoSave .0\" 'n' E (j v L5 : \"a Rao Case Q v Home Insert Draw Design Layout References Mailings Review View share GCDmments X 'I' ' . ' A c [an \"Ea T'meSNeWM V 12 " A A A3\" A0 AaBchDdEe AaBchDr AaBchDdE AaBb( Aasbcwdze AaBchDdEe ) d 'V Paste 6 B I g V ab x, x1 A V p ., A" NDSDacing Heading1 Headingz Title Subtitle SubtleEmph... 55%? Sensitivity nunvuunms vAvJ,\\lvv,vvv numuc. or unwuluv uuuno A,va,vvv Testing $13,500,000 number of testing hours 900,000 Packaging $24,000,000 number of containers 1,200,000 Although xed costs are lumped in with variable costs across the ve different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, with respect to all questions asked in this case, machining costs will be treated as entirely xed with respect to machine hours. Each machine is used in the production of multiple product lines. The resale value of machines is only affected by the passage of time and not by how much they are used in a given year. In all questions asked in this case, the rm will assume that costs associated with equipment setups, purchase orders, testing, and packaging & shipping are variable with respect to their respective activity measures. Currently, we believe our assumptions on cost behavior patterns are quite reasonable. All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed. Units of product are packaged in containers and sent to distributors. Production volumes are set equal to sales volumes since the company only produces products that they have orders for. Consequently, the rm never has a beginning work in process m or a beginning nished goods inventory. (Hence, the rm never has ending inventories.) Further information on our two products are provided in Exhibit 3 Exhibit 3 Ole Duo annual sales and production in units 240,000 100,000 number of units per batch 40 20 number of purchase orders 300 200 number of machine hours per unit 0.30 0.8 total number of testing hours 5,000 3,500 total number of containers 3,000 2,000 Page 2 of 4 1241 words U? English (United States) D Focus n 5% -'F+ 136%