Cawker Products has two manufacturing facilities—Lucas plant and Russell plant—that produce the same product. Until recently, the production process in both plants has been the same. Last year, the Russell production supervisor, Ann Tyler, determined that she could use lower-cost utility labor in place of the skilled direct labor to bring raw materials to the assembly line and move finished products to the warehouse. While the total time required remained the same, the new material handling process was included in
In looking over the production plans for next year, Jason Hunter, the CEO of Cawker Products, is surprised by the cost estimates for the two plants. Specifically, he notes that the overhead rate, which had been comparable between the two plants, is now much higher at the Russell plant. He suggests moving some of the production to Lucas to save money.
Required
Prepare a report that states how an activity-based costing system might benefit Cawker Products and clear up the CEO’s confusion.
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Fundamentals Of Cost Accounting (6th Edition)
- Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi Burrows, president of the company, wanted to compare product cost under the JIT system with product cost under the old system. Motts two products are weed eaters and lawn edgers. The unit prime costs under the old system are as follows: Under the old manufacturing system, the company operated three service centers and two production departments. Overhead was applied using departmental overhead rates. The direct overhead costs associated with each department for the year preceding the installation of JIT are as follows: Under the old system, the overhead costs of the service departments were allocated directly to the producing departments and then to the products passing through them. (Both products passed through each producing department.) The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly was based on direct labor hours. During the last year of operations for the old system, the Machining Department used 80,000 machine hours, and the Assembly Department used 20,000 direct labor hours. Each weed eater required 1.0 machine hour in Machining and 0.25 direct labor hour in Assembly. Each lawn edger required 2.0 machine hours in Machining and 0.5 hour in Assembly. Bases for allocation of the service costs are as follows: Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Each cell occupied 40,000 square feet. Maintenance and materials handling were both decentralized to the cell level. Essentially, cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell. During the first year of the JIT system, the company produced and sold 20,000 weed eaters and 30,000 lawn edgers. This output was identical to that for the last year of operations under the old system. The following costs have been assigned to the manufacturing cells: Required: 1. Compute the unit cost for each product under the old manufacturing system. 2. Compute the unit cost for each product under the JIT system. 3. Which of the unit costs is more accurate? Explain. Include in your explanation a discussion of how the computational approaches differ. 4. Calculate the decrease in overhead costs under JIT, and provide some possible reasons that explain the decrease.arrow_forwardGoulburn, Incorporated produces parts for heavy equipment used in mining and construction. The plant that produces one part common to many vehicles is highly automated, so all labor is considered part of factory overhead. The plant manager, who has just been promoted, would like to understand how overhead costs fluctuate in order to improve planning and budgets. After discussions with both financial and operations members of the plant staff, there is general agreement that the best cost driver for overhead is machine-hours. Monthly data were collected from the most recent two years on machine-hours and overhead. More months of data were available, but a process change had taken place about 30 months earlier, so the staff believed any data from before that time would be misleading. The data are shown in the following table: Month Machine-Hours Factory Overhead 1 39,300 $ 527,100 2 37,300 416,500 3 30,100 365,800 4 42,400 498,200 5 50,600 590,700 6 45,500 503,400 7…arrow_forwardDeedee Tech Sdn Bhd (DTSB) involves in the production of computer appliances. There are two producing departments in DTSB: assembly, and quality control. For the purpose of overhead allocation, the assembly department applies machine hours, while quality control department uses direct labour hours. However, if the plant-wide rate is applied, DTSB would use machine hours for the cost driver. The information below is related to the overhead costs of DTSB for the year 2021: Assembly Quality Control Total Estimated overhead RM250,000 RM130,000 RM380,000 Estimated machine hour 21,000 hours 3,000 hours 24,000 hours Estimated direct labour hour 20,000 hours 80,000 hours REQUIRED: (a) Calculate the predetermined overhead rate using:…arrow_forward
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- Arklan Production is upgrading its manufacturing process from a manual process to a highly automated system. Management believes that the new system will result in greater efficiencies and a better finished product. Arklan is also working on a plan to downsize staff after the implementation of the new system. Arklan has used a traditional absorption costing system to calculate unit product costs for external financial reporting. In the past, Arklan has allocated its manufacturing overhead costs using a predetermined plant-wide overhead rate based on direct labor hours. The controller realizes that the new system may require changing the overhead allocation process. Management plans to take the opportunity to reconsider other improvements to the costing system. Identify and explain three benefits of using departmental overhead rates to allocate overhead costs. Explain the difference between absorption costing and variable costing. Identify which is more suitable for internal…arrow_forwardPerez Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company's manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $292,000 and utility costs are $220,000. The typical consumption patterns for the two departments are as follows: Department I 15,000 6,000 Department II 5,000 10,000 Total 20,000 16,000 Machine hours used Direct labor hours used The supervisor of each department receives a bonus based on how well the department controls costs. The company's current policy requires using a single allocation base…arrow_forwardHannah Gilpin is the controller ofBlakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields.Her division has been under pressure to improve its divisional operating income. Currently,divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers,the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is includedin cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocatedcorporate overhead. The labor costs in question involve installation labor provided by traineeemployees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairlyinflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost ofgoods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overheadallocation costs. What should Gilpin…arrow_forward
- Hannah Gilpin is the controller ofBlakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields.Her division has been under pressure to improve its divisional operating income. Currently,divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers,the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is includedin cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocatedcorporate overhead. The labor costs in question involve installation labor provided by traineeemployees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairlyinflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost ofgoods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overheadallocation costs. Describe Gilpin’s…arrow_forwardSouthward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows: Radiator Cell Water Pump Cell Direct labor costs $168,400 $108,410 Direct overhead 656,760 395,550 Product…arrow_forwardTerry Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows. Activity Pools Repair and maintenance on assembly machine Cost Pool Total Cost Driver Number of units produced 121,800 Number of programming Programming cost 94,240 hours Number of inspections Number of tests Software inspections Product testing 7,560 11,780 $235,380 Total overhead cost Expected activity for each product follows. Number of Number Number Programming of Units of Number Inspections of Tests Hours Decoder 21,000 2,300 182 1,300 P Decoder 1,500 37,000 98 1,800 Q Total 58,000 3,800 280 3,100 Required: a. Compute the overhead rate for each activity pool. (Round your answers to 2 decimal places.) Allocation Rate Activity Pools Decoder P Decoder…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning