Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks. The company is currently Page 227 using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20x1, is as follows: Sales in units WHITESTONE COMPANY Budgeted Statement of Gross Margin for 20x1 JR-14 RM-13 Total 5,000 5,000 10,000 Sales revenue Cost of goods manufactured and sold: Beginning finished-goods inventory Add: Direct material Direct labor Applied manufacturing overhead* Cost of goods available for sale $1,700,000 $2,200,000 $3,900,000 $ 240,000 $300,000 $540,000 1,000,000 1,750,000 2,750,000 185,185 544,025 92,593 272,013 277,778 816,038 $1,969,210 $2,414,606 $4,383,816 Less: Ending finished-goods inventory Cost of goods sold 240,000 $1,729,210 300,000 $ 2,114,606 540,000 $3,843,816 Gross margin $ (29,210) $ 85,394 $ 56,184 *Total manufacturing overhead (applied on the basis of direct-labor hours); Machining Assembly $ 424,528 216,981 Material handling 56,604 Inspection Total 117,925 $ 816,038 Mark Ward, Whitestone's president, has been reading about a product-costing method called activity-based costing. Ward is convinced that activity-based costing will cast a new light on future profits. As a result, Brian Walters, Whitestone's director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13. Cost Pool Information for 20x1 Cost Pool Activity JR-14 RM-13 Direct labor Direct-labor hours 10,000 5,000 Machining Machine hours 15,000 30,000 Assembly Assembly hours 6,000 5,500 Material handling Number of parts 5 10 Inspection Inspection hours 5,000 7,500 In addition, the following information is projected for the next calendar year, 20x2. JR-14 RM-13 Beginning inventory, finished goods (in units) Ending inventory, finished goods (in units) Sales (in units) 800 600 700 700 5,100 4,900 On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories. Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method. Required: 1. Explain how activity-based costing differs from traditional product-costing methods. Page 228 2. Using activity-based costing, calculate the total cost in 20x2 for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities. (Hint: Refer to Exhibit 5-6, regarding calculation of the pool rate.) 3. Prepare a table showing for each product line the estimated 20x2 cost for each of the following cost elements: direct material, direct labor, machining, assembly, material handling, and inspection. (Round to the nearest dollar.) 4. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2, using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar.)