Reference no: EM131115595
Case Summary
Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:
Indirect labor 507,000
Cutting department 156,000
Finishing department 192,000
Total 855,000
The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:
Activity
Budgeted Activity Cost
Activity Base
Production control
237,000
Number of production runs
Materials handling
270,000
Number of moves
Total
507,000
The activity base usage quantities and units produced for the two products are shown below.
Number of Production Runs
Number of Moves
Direct Labor Hours- Cutting
Direct Labor Hours- Finishing
Units Produced
Snowboards
430
5,000
4,000
2,000
6,000
Skis
70
2,500
2,000
4,000
6,000
Total
500
7,500
6,000
6,000
12,000
Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is 315,000 and 540,000 for the Cutting and Finishing departments, respectively. Next, determine the total and per unit factory overhead costs allocated to each product, using the multiple production department overhead rates that you calculated.
Case Analysis
Using the information above, determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Determine the total and per unit cost assigned to each product under activity based costing.
Executive Decisions
The controller of Tri Con Global Systems Inc. devised a new costing system based on tracing the cost of activities to products. The controller was able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in order to have a more complete view of the company's product costs. This effort produced better strategic information about the relative profitability of a product lines. In addition, the controller used the same product cost information for inventory valuation of the financial statements. Surprisingly, the controller discovered that the company's reported net income was larger under this scheme than under traditional costing approaches. Why was the income larger , and what is your opinion of the controller's action?
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