The staff accountant for Sergeant Consulting Group has uncovered the following costs and activities associated with the two products.

Preliminary analysis of costs by Sergeant Consulting Group revealed that similar costs can be categorized into the following cost pools. Setup costs are costs that occur each time a new production run is made. They involve retooling and reconfiguring the machines and technology. Material handling costs include the equipment and personnel required to transport materials from supplier trucks to the machines. Typically, materials are taken to a storage area before being transported to machines. Each production run will need new materials and materials may also be transported during production runs. Machine costs primarily include depreciation and machine maintenance. Although the machines are depreciated using accelerated depreciation schedules, typically the machine wear out from use and are replaced before they become obsolete.

Receiving costs include the costs of clerical and technical help associated with the processing of each order received from a customer. Engineering costs include the technical support staff that implement design changes in the part, manage processes to maintain quality, and provide technical information on the product. The engineering staff maintain a record of the amount of time spent on each product. General plant costs include all the other administrative costs not included in the other cost pools.

Part 1: Compute overhead and gross margin using traditional costing

Part 2: Select the best cost driver and compute overhead rates for each cost pool.

Part 3: Compute overhead and gross margin using Activity-based Costing

Part 4: Recommendations- Increase in price for Product 234 by 25%

Part 5: Another reasonable recommendation to improve profitability. Explain recommendation here:

Part 6: Another reasonable recommendation to improve profitability. Explain recommendation here:

1) Argue for the use of Activity-based Costing by in this case by:

a) Describing when Activity-based Costing is appropriate and when Traditional Costing is appropriate and when each is not appropriate to use.

b) Discussing what are the strengths and weaknesses of ABC? When is it appropriate to use? What kinds of business situations suggest the need for ABC?

c) Applying a &b to the case and arguing for an Activity-based Costing system.

(2) Describe the Activity-based costing system you are recommending. Include a justification for the cost driver selected.

(3) Present your new cost findings. Include both per unit and total cost data. There should be tables with cost information included.

(4) Make strategy recommendations for each product and for the plant. Use the cost and profit numbers to justify these recommendations.

(5) Comment on the validity of the plant managers concern that competitors are selling below the cost of making Part 127.

(6) Explain the apparent lack of competition for Part 234 and the customers response to potential price increase.

(7) Make any other additional recommendations or suggestions.

Production Selling Price Prime costs per unit Number of production runs Receiving orders Machine hours Direct labor hours Part 127 500,000 $31.86 Part 234 100,000 $24.00 $9.53 $8.26 100 200 400 1,000 125,000 60,000 250,000 22,500 Engineering hours Material moves Overhead is allocated using a plant-wide rage based on direct labor hours. 5,000 5,000 500 400