Traditional and Activity Based Costing

CarryAll Company produces briefcases from leather, fabric, and synthetic materials in a single production department. The basic product is a standard briefcase made from leather and lined with fabric. CarryAll has a good reputation in the market because the standard briefcase is a high-quality item that has been produced for many years.

Last year, the company decided to expand its product line and produce specialty briefcases for special orders. These briefcases differ from the standard in that they vary in size, contain both leather and synthetic materials, and are imprinted with the buyer's logo (the standard briefcase is simply imprinted with the CarryAll name in small letters). The decision to use some synthetic materials in the briefcase was made to hold down the materials cost. To reduce the labor costs per unit, most of the cutting and stitching on the specialty briefcases is done by automated machines, which are used to a much lesser degree in the production of the standard briefcases. Because of these changes in the design and production of the specialty briefcases, CarryAll management believed that they would cost less to produce than the standard briefcases. However, because they are specialty items, they were priced slightly higher; standards are priced at $30 and specialty briefcases at $32.

CarryAll Company currently use a traditional plant-wide single rate costing system to allocate factory overhead cost. Factory overhead is applied on the basis of direct labor hours. The total factory overhead is $50,500 and the direct labor hours are 5,625. After reviewing last month's results of operations, CarryAll's president became concerned about the profitability of the two product lines because the standard briefcase showed a loss while the specialty briefcase showed a greater profit margin than expected. The president is wondering whether the company should drop

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the standard briefcase and focus entirely on specialty items. Units and cost data for last month's operations as reported to the president are as follows:

	Standard
Units produced	10,000
Direct materials
Leather (1 sq. yd. $15.00; 12 sq. yd. $15.00)	$15.00
Fabric (1 sq. yd. $5.00; 1 sq. yd. $5.00)	$ 5.00
Synthetic
Total materials	$20.00
Direct labor (12 hr. $12.00, 14 hr. $12.00)	$6.00
Manufacturing Overhead	?

Cost per unit

Specialty 2,500

$7.50 $5.00 $5.00

$17.50 $3.00

? ? ?

The problem with these costs is that they do not accurately reflect the activities involved in manufacturing each product. Determining the costs using ABC should provide better product costing data to help gauge the actual profitability of each product line.

The manufacturing overhead costs must be analyzed to determine the activities driving the costs. Assume that the following costs and cost drivers have been identified: The Purchasing Department's cost is $6,000. The major activity driving these costs is the number of purchase orders processed. During the month, the Purchasing Department prepared the following number of purchase orders for the materials indicated:

Leather - 20

Fabric - 30

Synthetic material - 50

The cost of receiving and inspecting materials is $7,500. These costs are driven by the number of deliveries. During the month, the following number of deliveries were made:

Leather - 30

Fabric - 40

Synthetic material 80

Production line setup cost is $10,000. Setup activities involve changing the machines to produce the different types of briefcases. Each setup for production of the standard briefcases requires one hour; each setup for specialty briefcases requires two hours. Standard briefcases are produced in batches of 200, and specialty briefcases are produced in batches of 25. During the last month, there were 50 setups for the standard item and 100 setups for the specialty item.

The cost of inspecting finished goods is $8,000. All briefcases are inspected to ensure that quality standards are met. However, the final inspection of standard briefcases takes very little time because the employees identify and correct quality problems as they do the hand cutting and stitching. A survey of the personnel responsible for inspecting the final products showed that 150 hours were spent on standard briefcases and 250 hours on specialty briefcases during the month. Equipment-related costs are $6,000. Equipment-related costs include repairs, depreciation, and utilities. Management has determined that a logical basis for assigning these costs to products is machine hours. A standard briefcase requires 1/2 hour of machine time, and a specialty briefcase requires two hours. Thus, during the last month, 5,000 hours of machine time relate to the standard line and 5,000 hours relate to the specialty line.

Plant-related costs are $13,000. These costs include property taxes, insurance, administration, and others. For the purpose of determining average unit costs, they are to be assigned to products using machine hour

Required Questions - Please provide each of the answers broken down. I have the breakdown of the ABC, which I have attached. Please provide a detailed answer for each point below.

a. Briefly discuss the advantages and disadvantages of the traditional single plantwide rate cost allocation, and activity-based costing.

b. Using the traditional cost allocation method, compute the overhead allocated to the two products, unit cost of each product, and evaluate the profitability of the two products.

c. Using activity-based costing concepts, what overhead costs should be assigned to the two products?

d. What is the unit cost of each product using activity-based costing concepts?

e. Reevaluate the president's concern about the profitability of the two product lines.

f. Discuss the merits of activity-based management as it relates to CarryAll's ABC cost system.

Material used Standard Speciality Total Units Produced (A) 10000 2500 Leather Cost per sq. yard (B) 15.00 S 15.00 Leather Cost per units (C ) S 15.00 S 7.50 Leather Sq Yard per unit (C/B) 1 0.5 Leather Req. Sq yard (C/B * A) 10000 1250 11250 Fabric Sq Yard per unit (given) (D) 1 1 Fabric Req. Sq yard (D*A) 10000 2500 12500 Purchasing Department Cost Allocation Leather Fabric Synthetic Total No. of Orders 20 30 50 100 Cost Allocated (6000/100*20) (6000/100*30) (6000/100*50) (6000/100 *No. of respective orders) S 1,200.00 S 1,800.00 S 3,000.00 S 6,000.00 Standard = (Cost Allocated/ Total Sq. (1200/11250*10000) (1800/12500*10000) yard)* Sq yard of Standard S 1,066.67 S 1,440.00 S 2,506.67 Speciality = (Cost Allocated/ Total (1200/11250*1250) 1800/12500*2500 Full Cost) Sq. yard)* Sq yard of Speciality 133.33 S 360.00 S 3,000.00 S 3,493.33 Total 1,200.00 S 1,800.00 S 3,000.00 S 6,000.00