Managerial Accounting: P5-59 Marconi Manufacturing produces two items in its Trumbull Plant

Managerial Accounting

Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and Ruff Stuff. Since inception, Marconi has used only one manufacturing-overhead cost pool to accumulate costs.

Overhead has been allocated to products based on direct-abor hours. Until recently, Marconi was the sole producer of Ruff Suff and was able to dictate the selling price.

However, last year Marvella Proucts began marketing a comparable product at a price below the cost assigned by Marconi. Market share has declined rapidly, and Marconi must now decide whether to meet the competitive price or to disontinue the product line.

Recognizing that discountinuing the product line wold place an additonal burden on its remaining product, Tuff Stuff, management is using activity-based costing to determine if it would show a different cost structure for the two products.

The two major indirect costs for manufacturing the products are power usage and setup costs. Most of the power is used in fabricating, while most of the setup costs are requiredin assembly. The setup costs are predominately related to Tuff Stuff product line.

A decision was made to separate the Manufacturing Department costs into two activity cost pools as follows:

Fabricating: machines hours will be the cost driver.

Assembly: number of setups will be the cost driver.

The controller has gathered the following information.

Manufacturing Department

Annual budget before separation of overhead

Product Line

Total Tuff Stuff Ruff Stuff

Number of units 20,000 20,000

Direct labor hours 2 hrs per unit 3 hours per unit

Total direct-labor cost 800,000

Direct material 5.00 per unit 3.00 per unit

Budgeted overhead:

Indirect labor 24,000

Fringe benefits 5,000

Indirect material 31,000

Power 180,000

Setup 75,000

Quality assurance 10,000

Other utilities 10,000

Depreciation 15,000

Manufacturing Department

Cost Structure after Separation of Overhead into Activity Cost Pools

Fabrication Assembly

Direct labor cost 75% 25%

Direct material (no change) 100% 0%

Indirect labor 75% 25%

Fringe benefits 80% 20%

Indirect material 20,000 11,000

Power 160,000 20,000

Setup 5,000 70,000

Quality assurance 80% 20%

Other utilites 50% 50%

Depreciation 80% 80%

Cost driver Product Line

Tuff Stuff Ruff Stuff

Machine hrs per unit 4.00 6.00

Setups 1,000 272

1. Assigning overhead based on direct-labor hours, calculate the following:

a. Total budgeted cost of the Manufacturing Department.

b. Unit cost of Tuff Stuff and Ruff Stuff.

2. After separation of overhead into activity cost pools, compute the total budgeted cost of each department: fabricating and assembly.

3. Using activity-based costing, calculate the unit costs for each product. ( In computing the pool rates for th efabricating and assembly activity cost pools, round to the nearest cent. Then, in computing unit product cost, round to the nearest cent).

4. Discuss how a decision regarding the production and pricing of Ruff Stuff will be affected by the results of your calculations in the preceding requirements.
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