Curl is entering the professional hairdryer market. Research shows that their customers wish to pay $307 or less for each dryer. The estimated cost per unit for each dryer is S160 and the target operating income per unit is $16. The management of Curl is considering the use of the cost-plus approach rather than the target-cost approach. Cost accountants at the manufacturer have collected the following information: Direct Materials /unit 50 Direct labor/unit 30 Variable overhead 30 Fixed costs annually 206,250 Estimated production for year one 3,750 1. Do you think that it's a good idea for Curl to use the cost-plus approach to price the hairdryer? 2. What strategies could Curl's management use to make a profit if the company insisted on using the cost-plus approach to price the hairdryer?

Curl is entering the professional hairdryer market. Research shows that their customers wish to pay $307 or less for each dryer. The estimated cost per unit for each dryer is S160 and the target operating income per unit is $16. The management of Curl is considering the use of the cost-plus approach rather than the target-cost approach. Cost accountants at the manufacturer have collected the following information: Direct Materials /unit 50 Direct labor/unit 30 Variable overhead 30 Fixed costs annually 206,250 Estimated production for year one 3,750 1. Do you think that it's a good idea for Curl to use the cost-plus approach to price the hairdryer? 2. What strategies could Curl's management use to make a profit if the company insisted on using the cost-plus approach to price the hairdryer?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter6: Activity-based, Variable, And Absorption Costing

Section: Chapter Questions

Problem 6PB: Box Springs. Inc., makes two sizes of box springs: queen and king. The direct material for the queen...

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Silven Company has identified the following overhead activities, costs, and activity drivers for the coming year: Silven produces two models of cell phones with the following expected activity demands: 1. Determine the total overhead assigned to each product using the four activity drivers. 2. Determine the total overhead assigned to each model using the two most expensive activities. The costs of the two relatively inexpensive activities are allocated to the two expensive activities in proportion to their costs. 3. Using ABC as the benchmark, calculate the percentage error and comment on the accuracy of the reduced system. Explain why this approach may be desirable.
Salley is developing material and labor standards for her company. She finds that it costs $0.55 per pound of material per widget. Each widget requires 6 pounds of material per widget. Salley is also working with the operations manager to determine what the standard labor cost is for a widget. Upon observation, Salley notes that it takes 3 hours in the assembly department and 1 hour in the finishing department to complete one widget. All employees are paid $10.50 per hour. A. What is the standard materials cost per unit for a widget? 8. What is the standard labor cost per unit for a widget?
Pinter Company had the following environmental activities and product information: 1. Environmental activity costs 2. Driver data 3. Other production data Required: 1. Calculate the activity rates that will be used to assign environmental costs to products. 2. Determine the unit environmental and unit costs of each product using ABC. 3. What if the design costs increased to 360,000 and the cost of toxic waste decreased to 750,000? Assume that Solvent Y uses 6,000 out of 12,000 design hours. Also assume that waste is cut by 50 percent and that Solvent Y is responsible for 14,250 of 15,000 pounds of toxic waste. What is the new environmental cost for Solvent Y?
Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for 66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows: Prior to making a decision, the companys CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following: 3 setups1,160 each (The setups would be avoided, and total spending could be reduced by 1,160 per setup.) One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is 12,300 and could be totally avoided if the part were purchased. Engineering work: 470 hours, 45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.) 75 fewer material moves at 30 per move. Required: 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier. 2. Now, using the special study data, repeat the analysis. 3. Discuss the qualitative factors that would affect the decision, including strategic implications. 4. After reviewing the special study, the controller made the following remark: This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs? Is the controller right?
Evans, Inc., has a unit-based costing system. Evanss Miami plant produces 10 different electronic products. The demand for each product is about the same. Although they differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. To help design engineers understand the assumed cost relationships, the Cost Accounting Department developed the following cost equation. (The equation describes the relationship between total manufacturing costs and direct labor hours; the equation is supported by a coefficient of determination of 60 percent.) Y=5,000,000+30X,whereX=directlaborhours The variable rate of 30 is broken down as follows: Because of competitive pressures, product engineering was given the charge to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on. After one year of design changes, the normal volume of direct labor was reduced from 250,000 hours to 200,000 hours, with the same number of products being produced. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, the labor content per unit of product dropped from 1.25 hours per unit to one hour per unit. Fixed overhead, however, increased from 5,000,000 to 6,600,000 per year. Suppose that a consultant was hired to explain the increase in fixed overhead costs. The consultants study revealed that the 30 per hour rate captured the unit-level variable costs; however, the cost behavior of other activities was quite different. For example, setting up equipment is a step-fixed cost, where each step is 2,000 setup hours, costing 90,000. The study also revealed that the cost of receiving goods is a function of the number of different components. This activity has a variable cost of 2,000 per component type and a fixed cost that follows a step-cost pattern. The step is defined by 20 components with a cost of 50,000 per step. Assume also that the consultant indicated that the design adopted by the engineers increased the demand for setups from 20,000 setup hours to 40,000 setup hours and the number of different components from 100 to 250. The demand for other non-unit-level activities remained unchanged. The consultant also recommended that management take a look at a rejected design for its products. This rejected design increased direct labor content from 250,000 hours to 260,000 hours, decreased the demand for setups from 20,000 hours to 10,000 hours, and decreased the demand for purchasing from 100 component types to 75 component types, while the demand for all other activities remained unchanged. Required: 1. Using normal volume, compute the manufacturing cost per labor hour before the year of design changes. What is the cost per unit of an average product? 2. Using normal volume after the one year of design changes, compute the manufacturing cost per hour. What is the cost per unit of an average product? 3. Before considering the consultants study, what do you think is the most likely explanation for the failure of the design changes to reduce manufacturing costs? Now use the information from the consultants study to explain the increase in the average cost per unit of product. What changes would you suggest to improve Evanss efforts to reduce costs? 4. Explain why the consultant recommended a second look at a rejected design. Provide computational support. What does this tell you about the strategic importance of cost management?
The management of Hartman Company is trying to determine the amount of each of two products to produce over the coming planning period. The following information concerns labor availability, labor utilization, and product profitability: a. Develop a linear programming model of the Hartman Company problem. Solve the model to determine the optimal production quantities of products 1 and 2. b. In computing the profit contribution per unit, management does not deduct labor costs because they are considered fixed for the upcoming planning period. However, suppose that overtime can be scheduled in some of the departments. Which departments would you recommend scheduling for overtime? How much would you be willing to pay per hour of overtime in each department? c. Suppose that 10, 6, and 8 hours of overtime may be scheduled in departments A, B, and C, respectively. The cost per hour of overtime is 18 in department A, 22.50 in department B, and 12 in department C. Formulate a linear programming model that can be used to determine the optimal production quantities if overtime is made available. What are the optimal production quantities, and what is the revised total contribution to profit? How much overtime do you recommend using in each department? What is the increase in the total contribution to profit if overtime is used?
Medical Tape makes two products: Generic and Label. It estimates it will produce 423,694 units of Generic and 652,200 of Label, and the overhead for each of its cost pools is as follows: It has also estimated the activities for each cost driver as follows: How much is the overhead allocated to each unit of Generic and Label?
Box Springs. Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows: How much does each unit cost to manufacture?
As a new accountant of the company, you are provided with the following information related to KOKO: Product Annual production and sales unit Direct material cost per unit Direct labour cost per unit Machine hours per unit Selling price per unit Koko 5,500 RM50 RM35 3 hours RM150 The company is considering of changing the traditional method to the Activity Based Costing (ABC) method. In order to adopt ABC method the following information is required: Activity Cost Cost Driver Pool Expected overhead Expected use of drivers per product Other products 3,500 costs Коко (RM) No of purchase orders Machine hours Maintenance Maintenance hours Number of inspections Total Purchasing 4,000 37,500 Machining 16,500 8,000 1,500 147,000 43,000 3,500 Quality control 1900 1600 17,500 245,000 Required: a. If the company decided to use the Activity Based Costing (ABC) method, determine the cost per unit of KOKO. Based on your answer in (a), advise whether the company should change to ABC method. Support…
The controller of Ferrence Company estimates the amount of materials handling overhead cost that should be allocated to the company's two products using the data that are given below: The total materials handling cost for the year is expected to be $16,486.40. If the materials handling cost is allocated on the basis of material moves, how much of the total materials handling cost should be allocated to the specialty windows? (Round off your answer to the nearest whole dollar.) Question 12 options: $3,266 $9,274 $8,243 $6,595
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