Mallory Luongo, Inc. manufactures five models  - Expert Answers

Mallory Luongo, Inc. manufactures five models - Expert Answers


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. 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 below, identify for each activity one or more cost drivers that might be used to assign overhead to Mallory Luongo's five products. (If several answers appear right, select the answer that lists all the cost drivers that might be used.)

Purchasing raw materials and parts.
Storing and managing inventory.
Receiving and inspecting raw materials and parts.
Interviewing and hiring new personnel.
Machine forming sheet steel into appliance parts.
Manually assembling parts into appliances.
Training all employees of the company.
Insuring all tangible fixed assets.
Supervising production.
Maintaining and repairing machinery and equipment.
Painting and packaging finished appliances.

E4-11 (a,b)   

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.

 Activity  Cost Driver  Total Cost        

 1. Materials handling  Number of requisitions  $35,000         

 2. Machine setups  Number of setups  27,500        

 3. Quality inspections  Number of inspections  27,000        


The cost driver volume for each product was as follows.              

Cost Driver  Instruments Gauges Total     

 Number of requisitions  400  600  1,000      

 Number of setups  200  300  500      

 Number of inspections  200  400  600      

Determine the overhead rate for each activity.

Assign the manufacturing overhead costs for April to the two products using activity-based costing.

P4-3A (a,c)            

Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.

  Overhead Cost Pools  Amount          

  Purchasing   57,000           

  Handling materials   82,000           

  Production (cutting, milling, finishing)   210,000           

  Setting up machines   85,000           

  Inspecting   90,000           

  Inventory control (raw materials and finished goods)   126,000           

  Utilities   180,000           

  Total budget overhead costs   830,000           
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.       

              Activity Cost Pools    Expected        

    Cost Drivers  Use of        

      Cost Drivers        

  Purchasing  Number of orders   600         

  Handling materials  Number of moves   8,000         

  Production (cutting, milling, finishing)  Direct labor hours   100,000         

  Setting up machines  Number of setups   1,250         

  Inspecting   Number of inspections   6,000         

  Inventory control (raw materials and finished goods)  Number of components   168,000         

  Utilities   Square feet occupied   90,000         

David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David's request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.  

Direct materials   103,600           

  Direct labor   112,000           

  Machine hours   14,500           

  Direct labor hours   5,000           

  Number of purchase orders   60           

  Number of material moves   800           

  Number of machine setups   100           

  Number of inspections   450           

  Number of components   16,000           

  Number of square feet occupied   8,000           

Compute the predetermined overhead rate using traditional costing with machine hours as the basis. (Enter answer to 2 decimal places, e.g. 10.50.)               

What is the manufacturing cost per stairway under traditional costing? (Use rounded amount from part (a). Round answer to 2 decimal places, e.g. 10.50.)

What is the manufacturing cost per stairway under the proposed activity-based costing? (Round activity-based overhead rates to 2 decimal places, e.g. 10.50. Round final answer to 2 decimal places, 10.50.)

d)Which of the two costing systems is preferable in pricing decisions and why? Refer to P4-3A (a-c).

P4-4A (a-d)                  

Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line. 

Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.     
Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
CoolDay  LiteMist              

Direct materials per liter  0.4  1.2              

Direct labor cost per liter  0.25  0.5              

Direct labor hours per liter  0.05  0.09              

Total direct labor hours   150,000    27,000            

Activity Cost Pool  Cost Driver  Estimated Overhead  Expected  Expected Use of          

      Use of  Cost Drivers per Product          

      Cost Drivers  CoolDay  LiteMist        

Grape processing  Cart of grapes   $145,860   6600   6,000    600         

Aging   Total months   $396,000   6600000   3,000,000    3,600,000         

Bottling and corking  Number of bottles   $270,000   900000   600,000    300,000         
Labeling and boxing   Number of bottles   $189,000   900000   600,000    300,000        

Maintain and inspect equipment  Number of inspections   $240,800   800   350    450         


a)Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products. (Round computations and final answers to 3 decimal places, e.g. 2.250.) 

b) Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver). (Enter overhead rate to 2 decimal places, e.g. 10.50.) 

c) Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter? (Enter overhead rate to 2 decimal places, e.g. 10.50 and round overhead cost per liter to 3 decimal places, e.g. 2.250.) 

d) Compute the total manufacturing cost per liter for both products under ABC. (Round answers to 3 decimal places, e.g. 2.250.)
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