Compute the total budget indirect manufacturing cost for 20x3

Problem 1.

Activity Allocation Base
Cost Allocation Rate

Materials handling Number of parts
$1.75 per part

Machine setup Number of setup
300.00 per setup

Insertion of parts Number of parts
4.00 per part

Finishing Finishing direct labor
hours 70.00 per hour

The number of parts is now a feasible allocation base because Spokes
recently purchased bar coding technology. Spokes produces two wheels
models: standard and deluxe. Budgeted data for 20x3 are as follows:

Standard
Deluxe

Parts per wheel 5.0
7.0

Setups per 1,000 wheels 3.0
3.0

Finishing direct labor hours per wheel 0.2
1.0

Total direct labor hours per wheel 2.0
3.0

The company’s manager’s expect to produce 1, 000 units of each
model during the year.

Compute the total budget indirect manufacturing cost for 20x3

Compute the ABC indirect manufacturing cost per unit of each model.

Using Spokes old direct labor hours single-allocation base system,
compute the (single) allocation rate based on direct labor hours. Use
this rate to determine the indirect manufacturing cost per wheel for
each model under the old single-allocation –base method.

Hint: Deluxe model ABC Cost $111.15

Problem 2.

Refer to exercise 25-2. For 20x4, Spokes manager have decided to use the
same indirect manufacturing costs per wheel that they computed in 20x3.
In addition to the unit indirect manufacturing costs, the following data
are budgeted for the company’s standard and deluxe models for 20x4:

Sale price $155.00
$215.00

Direct materials 15.00
25.00

Direct labor 30.00
45.00

Because of limited machine hour capacity, Spokes can produce either
2,000 standard wheels or 2,000 deluxe wheels.

If a managers rely on the ABC unit cost data computed in Problem 1,
which model will they produce? (all nonmanufacturing costs are the same
for both models)

If the managers rely on the single-allocation base cost data, which
model will they produce?

Which course of action will yield more income for Spokes?

Problem 3.

Wheels Inc., uses activity-based costing to account for its chrome wheel
manufacturing process, Company managers have identified four
manufacturing activities; materials handling, machine setup, insertion
of parts and finishing. The budget activity costs for 20x3 and their
allocation bases are as follows;

Activity Total Budgeted Cost
Allocation Base

Materials handling $18,000
Number of parts

Machine setup 2,800
Number of setups

Insertion of parts 24,000
Number of parts

Finishing 60,000
Finishing direct labor hours

Wheels, Inc, expects to produce 2, 000 chrome wheels during the year.
The wheels are expected to use 12,000 parts, require 8 setups and 1,000
hours of finishing time.

Compute the cost allocation for each activity

Compute the indirect manufacturing cost of each wheel.

Hint: Indirect cost per wheel $52.40

Problem 4.

Refer to problem 1, Controller Lindsay is surprised by the increase in
cost of the deluxe model under ABC. Market research shows that to remain
a viable cost of $165 for the deluxe wheel. A value engineering study by
Spokes employees suggest that modifications to the finishing process
could cut finishing cost from $70 to $60 per hour and reduce the
finishing direct labor hours per deluxe wheel from 1 hour to 0.8 hour
per wheel. Direct materials would remain unchanged at $25 per wheel, as
would direct labor at $45 per wheel. The materials handling, machine
setups and insertion of parts activity costs would remain the same as in
Problem 1. Would implementing the value engineering recommendation
allow Spokes to achieve its target ABC-based cost for the deluxe wheel?

Hint: Cost of deluxe wheel, $159.15