E4-10 Mallory Luongo, Inc. manufactures five models of kitchen appliances at its Mesa plant. The company is installing activity-based costing and has identified the following activities performed at its Mesa plant.
1. Designing new models.
2. Purchasing raw materials and parts.
3. Storing and managing inventory.
4. Receiving and inspecting raw materials and parts.
5. Interviewing and hiring new personnel.
6. Machine forming sheet steel into appliance parts.
7. Manually assembling parts into appliances.
8. Training all employees of the company.
9. Insuring all tangible fixed assets.
10. Supervising production.
11. Maintaining and repairing machinery and equipment.
12. Painting and packaging finished appliances.
Having analyzed its Mesa plant operations for purposes of installing activity-based costing, Mallory Luongo, Inc. identified its activity cost centers. It now needs to identify relevant activity cost drivers in order to assign overhead costs to its products.
Using the activities listed above, identify for each activity one or more cost drivers that might be used to assign overhead to Mallory Luongo’s five products.
E4-11 Sorce Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
(A) Determine the overhead rate for each activity
(B) Assign the manufacturing overhead costs for April to the two products using activity based costing.
(C) Write a memorandum to the president of Sorce Instrument explaining the benefits of activity-based costing.
P4-3A Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.
For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted. Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse’s request, Neal and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
David Hannon, sales manager, has received an order for 280 stairways from Community Builders, Inc., a large housing development contractor. At David’s request, Neal prepares cost estimates for producing components for 280 stairways so David can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 280 stairways.
(A) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(B) What is the manufacturing cost per stairway under traditional costing?
(C) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)
(D) Which of the two costing systems is preferable in pricing decisions and why?
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