Reference no: EM131105802

Happy Cat, Inc., makes two lines of cat food: (1) Tabby Treat, and (2) Fresh n' Fishy. The Tabby Treat line is a dry food that is processed almost entirely by an automated process. Fresh n' Fishy is a canned food made with real carp from the Mississippi River. Each carp is filleted by hand before being tossed into an automated grinding and canning machine. Tabby Treat sells very well and is priced significantly below competitive brands. Sales of Fresh n' Fishy have been on the decline, as the company has failed to keep the brand price competitive. Other information concerning each product line is provided below.

	Tabby Treat	Fresh n' Fishy
Number of units* produced and sold per month	75,000	48,000
Direct materials cost per unit	$1	$3
Direct labor cost per hour	$16	$16
Direct labor hours per unit	0.04	0.25

*Units for Tabby Treat refer to bags. Units for Fresh n' Fishy refer to cases.

The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $60,000, whereas budgeted direct labor hours amount to 15,000 per month.

Cost Pool	Amount Allocated	Cost Driver	Total Driver Volume
Utilities	$26,000	Kilowatt-hours	250,000 kWh
Maintenance	19,000	Machine set-ups	100 set-ups
Depreciation of plant and equipment	12,000	Square feet occupied	50,000 sq. ft.
Miscellaneous	3,000	Direct labor hours	15,000 DLH
Total allocation	$60,000

Happy Cat recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing overhead. He proposes that the following cost pools and cost drivers be used:

The amount of driver activity corresponding to each product line is as follows:

Cost Driver	Tabby Treat	Fresh n' Fishy
Kilowatt-hours	200,000 kWh	50,000 kWh
Machine set-ups	70 mh	30 mh
Square feet occupied	42,000 sq. ft.	8,000 sq. ft.
Direct labor hours	3,000 DLH	12,000 DLH

Instructions

a. Allocate manufacturing overhead costs to each product line using direct labor hours as a sin- gle cost driver.

b. Allocate manufacturing overhead costs to each product line using the activity-based costing approach recommended by the consultant.

c. Compute the total monthly manufacturing costs assigned to each product line when activity- based costing is used to allocate manufacturing overhead.

d. Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. On the basis of your results from parts a and b, discuss a possible reason why sales of the Fresh n' Fishy product line are currently experiencing a decline.

e. Discuss reasons why the company should adopt the recommendation of the consultant to implement an activity-based costing system.