ASSIGNMENT (10 Points) The Winona plant of Minnehaha Electronic Company manufactures two products: CD107 and CD635. The company has established the...
ASSIGNMENT (10 Points)
The Winona plant of Minnehaha Electronic Company manufactures two products: CD107 and CD635. The company has established the following three cost pools for its manufacturing support costs:
MINNEHAHA ELECTRONIC COMPANY
WINONA PLANT'S COST POOLS FOR CD 107 AND CD63 5
Cost Pool Manufacturing Support Costs
S $ 640,000
P1 400,000
P2 200,000
Total $1,240,000
Pool S includes all support activity costs at the plant. Pools P1 and P2 include support costs traced directly to the two production departments, fabrication (P1) and assembly (P2), respectively. The current cost accounting system at the plant employs a two‑stage cost allocation method that first allocates manufacturing support costs in pool S to the pools P1 and P2 on the basis of machine hours and then assigns the accumulated manufacturing costs in the pools PI and P2 to the two products on the basis of direct labor hours. A separate cost driver rate is computed for each of the two production departments. The direct labor wage rate including benefits is $15 per hour.
The following information was collected from plant records for June 1997:
MINNEHAHA ELECTRONIC COMPANY
WINONA PLANT'S DIRECT LABOR HOURS FOR JUNE 1997
Direct Labor Hours (DLH)
Department CD107 CD635 Total
Fabrication (P 1) 20,000 20,000 40,000
Assembly (P2) 25,000 15,000 40,000
Total 45,000 35,000 80,000
MINNEHAHA ELECTRONIC COMPANY
WINONA PLANT'S MACHINE HOURS FOR JUNE 1997
Machine‑Hours (MH)
Department CD107 CD635 Total
Fabrication (P I) 27,000 18,000 45,000
Assembly (P2) 20,000 15,000 35,000
Total 47,000 33,000 80,000
Sales price per unit $260 $220
Direct material cost per unit $ 80 $ 40
Units produced and sold 8,000 6,000
The plant is considering implementing an activity‑based costing system. The controller has compiled the following information to reassign the manufacturing support costs for June 1997 from the existing cost pools (S, P1, P2) to five new activity cost pools:
MINNEHAHA ELECTRONIC COMPANY
WINONA PLANT'S NEW ACTIVITY COST POOLS FOR JUNE 1997
Existing Cost Pool
Activity
Cost Drivers S P1 P2 Total
Pl‑DLH $ 40,000 $ 40,000 $ 0 $ 80,000
P2‑DLH 150,000 0 80,000 230,000
P1‑MH 50,000 110,000 0 160,000
P2‑MH 60,000 0 40,000 100,000
Setup hours 340,000 250,000 80,000 670,000
Totals $640,000 $400,000 $200,000 $1,240,000
The number of setups in June 1997 was 1000 for each of the two products, but each setup for CD 107 takes twice as long as a setup for CD635.
(a) Determine the product cost per unit for both CD107 and CD635 using the existing cost accounting system.
(b) Determine the product cost per unit for the two products using the proposed activity‑based costing system.
(c) Explain why the product costs differ in the two cost accounting systems.