Reference no: EM132305776

Question 1:

Tas Machinery manufactures two products, basic and superior, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $1,532,000 and 38,300 hours, respectively. Information about the company's products follows:

Tas Machinery's overhead of $1,532,000 can be identified with three major activities: order processing ($288,000), machine processing ($1052,000) and product inspection ($192,000). These activities are driven by number of orders processed, machine hours worked and inspection hours, respectively. Data relevant to these activities follow:

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in profit is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed-machinery that was expected to produce significant operating efficiencies.

Required

1. Assuming use of direct labour hours to apply overhead to production, calculate the unit manufacturing costs of the basic and superior products if the expected manufacturing volume is attained.

2. Assuming use of activity-based costing, calculate the unit manufacturing costs of the basic and superior if the expected manufacturing volume is attained.

3. Tas Machinery's selling prices are based heavily on cost.

1. (a) Using direct labour hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product.

2. (b)Is it possible that overcosting and undercosting (i.e. cost distortion) and the subsequent determination of selling prices are contributing to the company's profit woes? Explain.

Question 2:

Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows.

The management accountant has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities' three respective cost drivers, follow:

The firm's total overhead of $4,620,000 is subdivided as follows: manufacturing setups, $1,008,000; machine processing, $2,772,000; and product shipping, $840,000.

Required

1. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using the company's current overhead costing procedures Deluxe Executive Unit manufacturing costs

2. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using activity-based costing. (Round your intermediate calculations and final answers to 2 decimal places.) Deluxe Executive Unit manufacturing costs

3. Is the cost of the Deluxe cabinet overstated or understated (i.e. distorted) by the use of machine hours to allocate total manufacturing overhead to production? If so, by how much? (Round your intermediate calculations and final answers to 2 decimal places. Input the amount as positive value.

Have to options deluxe storage is undertated or overstated ?

4. Calculate the aggregate amount by which the Deluxe cabinet line is undercosted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system overcosts the Executive cabinet line. (Round your intermediate calculations and final answers to 2 decimal places. Input the amount as positive value. )

5. Assume that the current selling price of a Type A storage cabinet is $400 and the marketing manager is contemplating a $60 discount to stimulate volume. Is this discount advisable? Briefly discuss.

Question 3:

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends and packages them for resale. WGCC currently has 15 different coffees, which it offers to gourmet shops in 1-kilogram bags. The major cost lies in raw materials, but there is also a substantial amount of manufacturing overhead in the automated roasting and packing processes. The company uses relatively little direct labour.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 25 percent. If this method leads to prices that are significantly higher than market price, the price is adjusted downwards. The company competes primarily on the quality of its products, but customers are also price conscious.

Data for next year's budget include manufacturing overhead of $17,611,200, which has been allocated on the basis of each product's direct labour cost. The budgeted direct labour cost for next year totals $1,761,120. Based on the sales budget and raw material budget, purchases and use of raw materials (mostly coffee beans) will total $6,800,000.

The expected prime costs for 1-kilogram bags of two of the company's products are as follows:

                              Kona    Malaysian

Direct material           $3.90     $4.90

Direct labor               0.80       0.80

WGCC's controller believes the traditional product costing system may be providing misleading cost information. She has developed an analysis of the budgeted manufacturing overhead costs for next year, as follows:

Data for next year's production of Kona and Malaysian coffees are shown in the following table. There will be no raw material inventory for either of these products at the beginning of next year.

Required:

1. Using WGCC's current product-costing system:
a. Determine the company's predetermined overhead rate using direct-labor cost as the single cost driver.
b. determine the product costs and selling prices of 1 kilogram of Kona coffee and 1 kilogram of Malaysian coffee.

2. Develop new product costs. using activity-based costing, for 1 kilogram of Kona coffee and 1 kilogram of Malaysian coffee.

a. determine the company's predetermined overhead rate using direct labour cost as the single cost driver

b. determine the product costs and selling prices of 1 kilogram of Kona coffee and 1 kilogram of Malaysian coffee.

c. Develop new product costs. using activity-based costing, for 1 kilogram of Kona coffee and 1 kilogram of Malaysian coffee.

Write a report to management stating why unit manufacturing costs differ using Activity based costing compared with the traditional approach (Use information from ONE of the companies in Part 1 of this assessment: Tas Manufacturing, Pristine Ltd or World Gourmet Coffee Company in your examples. (5 marks) Instructions The answer to this question must be typed on a word document and comply with the following requirements: Font: Times New Roman, font size 12 and a line spacing of 1.5. Word count: The length of the answer should not exceed 500 words.