ACCT 2102 1st Edition Lecture 13 Outline of Last Lecture I Example with ABC Costing II Other ABC Considerations Outline of Current Lecture III In Class Example 1 IV In Class Example 2 Current Lecture In Class Examples of ABC Chapter 4 III In Class Example 1 Before the Amplifier is a manufacturer of guitars The company sells acoustic and electric guitars The electric guitar line is not as profitable as expected despite high production levels Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy Currently manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit production costs The following information has been prepared GIVEN Activity Cost Driver Cost Pool Assembly DL Hours 500 Machining Machine Hours 1 500 Setting Up Equipment Number of Setups 1 200 Moving Goods Number of Moves 800 WORKED Activity Cost Driver Cost Pool Acoustic Electric Total Assembly DL Hours 500 20 DL hours 80 DL Hours 100 DL These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute hours Machining Machine Hours 1 500 10 M Hours 40 M Hours 50 M Hours Setting Up Equipment Number of Setups 1 200 4 Setups 4 Setups 8 Setups Moving Goods Number of Moves 800 1 Move 4 Moves 5 Moves Total 4 000 Each Acoustic guitar requires 1 direct labor hour and 5 machine hours to produce Each Electric guitar requires 8 direct labor hours and 4 machine hours to produce The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced Acoustic guitars are moved during production in groups of 20 guitars Electric guitars are moved during production in groups of 25 guitars The direct material cost per Acoustic guitar is 60 and the direct material cost per Electric guitar is 70 Direct Laborers are paid at a rate of 25 per hour The projected production levels for the period are 20 Acoustic guitars and 100 Electric guitars Determine the amount by which the lines are over underallocated IN TOTAL Traditional Costing System POHR 1 4 000 100 DL hrs 40 DL hr ABC Costing System POHR 1 500 100 DL hrs POHR 2 1 500 50 m hrs POHR 3 1 200 8 setups POHR 4 800 5 moves 5 DL hr 30 m hr 150 setup 160 move Acoustic per unit approach DM 60 DM 60 DL 25 x 1 hr 25 DL 25 x 1 hr 25 MOH 40 x 1 hr 40 MOH 1 5 x 20 hrs 20 5 Total per unit 125 2 30 x 10 hrs 20 15 3 150 x 4 setup 20 30 4 160 x 1 move 20 8 Total per unit 143 125 143 18 unit undercosted Total undercosted 18 unit x 20 guitars 360 undercosted Electric DM 70 DM 70 DL 25 x 8 hrs 20 DL 25 x 8 hrs 20 MOH 40 x 8 hrs 32 MOH 1 5 x 80 hrs 100 4 122 2 30 x 40 hrs 100 12 3 150 x 4 setup 100 6 4 160 x 4 move 100 6 4 Total job cost Total job cost 118 40 122 118 40 3 60 unit overcosted Total overcosted 3 60 unit x 100 guitars 360 overcosted The higher volume product is normally overcosted by the traditional system IV In Class Example 2 Don t Cry Over Spilled Milk LLC manufactures two lines of mops Wooden Handled and Metal Handled Under the traditional costing system manufacturing overhead is applied to each line based on machine hours Machine Setup costs account for the majority of manufacturing overhead costs and are budgeted to be 75 000 for the current period The controller for Don t Cry has suggested to management that an activity based costing system be analyzed and has determined that the number of machine setups drives the total machine setup costs The following information was compiled for the analysis GIVEN Wooden Handled Metal Handled 2 5 750 500 25 10 Machine Hours per Mop Budgeted Number of Mops to Be Produced Number of Mops to Be Produced per Machine Setup WORKED Wooden Handled Machine Hours Machine Setups 750 x 2 1 500 M Hours Metal Handled Total 500 x 5 2 500 M Hours 4 000 M Hours 750 25 30 Setups 500 50 10 Setups 80 Setups Which product line is overcosted with respect to machine setup costs Traditional Costing System POHR 1 ABC Costing System 75 000 18 75 m hr POHR 1 4 000 m hrs Wooden Total approach MOH 18 75 x 1 500 m hrs 28 125 75 000 937 50 setup 80 setups MOH 1 937 50 x 30 setups 28 125 MOH 1 937 50 x 50 setups 46 875 Not over or undercosted Metal MOH 18 75 x 2500 m hrs 46 875 Not over or undercosted Since both jobs are neither under or overcosted this company should not implement ABC costing system for their products