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Vines Ltd produces custom machine parts on a job order basis. The company has two direct product cost categories: direct materials and direct labour....
Vines Ltd produces custom machine parts on a job order basis. The company has two direct product cost categories: direct materials and direct labour. In the past, indirect manufacturing costs were allocated to products using a single indirect cost pool, allocated based on direct labour hours. The indirect cost rate was $115 per direct labour hour.
The managers of Vines Ltd decided to switch from a manual system to software programs that release materials and signal machines when to begin working. Simultaneously, the company adopted an activity-based costing system. The manufacturing process has been organised into six activities, each with its own supervisor who is responsible for controlling costs. The following list indicates the activities, cost drivers, and cost allocation rates.
Activity
Cost driver
Cost per unit of cost driver
Materials handling
Number of parts
$0.40
Milling
Machine hours
$20.00
Grinding
Number of parts
$0.80
Assembly
Hours spent in assembly
$5.00
Inspection
Number of units produced
$25.00
Shipping
Number of orders shipped
$1500.00
The company's information system automatically collects the necessary data for these six activity areas. The data for two recent jobs follow:
Job order 410
Job order 411
Direct materials cost
$9,700
$59,900
Direct labour cost
$750
$11,250
Number of direct labour hours
25
375
Number of parts
500
2000
Number of machine hours
150
1050
Number of job orders shipped
1
1
Number of units
10
200
Number of hours in assembly
2
30
Required(a) Suppose the company had not adopted an ABC system. Compute the manufacturing cost per unit for job orders 410 and 411 under the old, conventional costing system.
(b) Under the new ABC system, calculate the manufacturing cost per unit for job orders 410 and 411.
(c) Compare the costs per unit for job orders 410 and 411 as calculated. Explain why the cost per unit under the conventional costing system is different from cost per unit under the ABC system.
(d) Explain why uncertainties may arise about the choice of cost drivers for each activity.
(e) Identify and explain to Vine Ltd's managers the possible advantages and disadvantages of adopting the ABC system.
