| Using the information provided below, complete the following two tabs in this MS Excel Workbook: |
| – MOH Cost Allocation – Traditional Methodology |
| – MOH Cost Allocation – Activity-based Costing (ABC) Methodology (complete partially completed analysis) |
| The background paper, Management Accounting Concepts, provides useful guidance for completing this assignment. | |
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| Compare the results you obtained in these two tabs. Describe briefly below the likely effects of management’s decision to adopt the traditional method, rather than the ABC method, of allocating MOH costs to products. (In formulating your response, it may be helpful to review pages 43 – 44 of the background paper, Management Accounting Concepts.) Limit the length of your response to 150 words. |
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| Replace this text with your response. | |
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| Company information: | |
| A division of Premium Products Company operates from a single plant located in the midwestern U.S. | |
| The division makes and sells 3 products. Shown below for each product is management’s fiscal year ending (FYE) Dec. 31, 20X2 plans for: | |
| | | | | | | | | | | | |
| Product | | |
| A-199 | B-299 | C-399 | | |
| – Units of production and sales | 10,000 | 10,000 | 10,000 | |
| – Production batch size (units in each production run) | 25 | 40 | 100 | |
| – Product unit selling price | $ 197.00 | $ 170.00 | $ 148.00 | |
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| Management organized the plant to operate in the nine service and production departments listed below. For each department listed is shown: | |
| – The normal, expected MOH costs (obtained from the approved production plan and operating budget for the FYE Dec. 31, 20X2) |
| – The MOH allocation base selected by management, which adopted the traditional MOH allocation method (see next tab in this workbook) |
| – The planned (i) total value of each MOH allocation base and (ii) consumption of each base by each production department |
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| | $US | MOH allocation base | Casting | Machining | Assembly | Packing | Total |
| Production scheduling | 151,000 | Machine hours (MHs) | Unit-related | 9,000 | 22,500 | 9,000 | 4,500 | 45,000 |
| Quality inspection | 313,000 | Batches | Unit-related | 75 | 300 | 225 | 150 | 750 |
| M&E* setup | 83,000 | M&E setups hours | Batch-related | 980 | 2,450 | 980 | 490 | 4,900 |
| M&E* maintenance | 502,000 | M&E Maint. Dept. hours | Unit-related | 4,500 | 9,000 | 2,700 | 1,800 | 18,000 |
| Building and admin. | 522,000 | Full-time employees | Plant-related | 8 | 12 | 10 | 10 | 40 |
| Casting | 125,000 | MHs | Unit-related | 9,000 | 22,500 | 9,000 | 4,500 | 45,000 |
| Machining | 250,000 | MHs | Unit-related | 9,000 | 22,500 | 9,000 | 4,500 | 45,000 |
| Assembly | 106,000 | Direct labor hours (DLHs) | Unit-related | 4,100 | 17,000 | 10,500 | 10,400 | 42,000 |
| Packing | 71,000 | DLHs | Unit-related | 4,100 | 17,000 | 10,500 | 10,400 | 42,000 |
| Total | 2,123,000 | |
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| * M&E: machinery and equipment |
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| The company’s engineering department determined the following standard per-unit requirements of: | |
| – MHs and DLHs in each production department |
| – Direct material and direct labor cost |
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| | Product | |
| Per-unit requirements | A-199 | B-299 | C-399 | |
| | MHs in each production department: |
| | | Casting | 0.3 | 0.3 | 0.3 | |
| | | Machining | 0.9 | 0.7 | 0.6 | |
| | | Assembly | 0.4 | 0.3 | 0.2 | |
| | | Packing | 0.2 | 0.2 | 0.1 | |
| | | Total | 1.8 | 1.5 | 1.2 | |
| | DLHs in each production department: |
| | | Casting | 0.2 | 0.2 | 0.2 | |
| | | Machining | 1.0 | 0.6 | 0.2 | |
| | | Assembly | 0.5 | 0.4 | 0.3 | |
| | | Packing | 0.3 | 0.3 | 0.3 | |
| | | Total | 2.0 | 1.5 | 1.0 | |
| Cost per unit: |
| | Direct material | $ 28.00 | $ 25.00 | $ 22.00 | |
| | Direct labor (including “fringe”) | $ 38.00 | $ 33.00 | $ 28.00 | |
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| The facilitator will grade this assignment, assigning up to 100 points for it as follows: | Maximum | Earned | | | |
| Accurate, essentially complete, and concise description of the reasons that the traditional | | |
| method of allocating MOH costs may lead to distortions in computed product unit costs and | | |
| the adverse effects such distortions may have on management’s decisions | 20 | 20 | points | |
| Traditional method of MOH cost allocation – Accuracy and completeness of: | |
| | – Amounts and other information input into MS Excel worksheet | 15 | 15 | points | |
| | – Accuracy of computations of per-unit MOH cost and total cost of each product | 25 | 25 | points | |
| Activity-based method of MOH cost allocation – Accuracy and completeness of: | |
| | – Amounts and other information input into MS Excel worksheet | 15 | 15 | points | |
| | – Accuracy of computations of per-unit MOH cost and total cost of each product | 25 | 25 | points | |
| | | Total points | 100 | 100Premium Products CompanyManufacturing Overhead (MOH) Cost Allocation – Activity-based Costing (ABC) MethodologyFor fiscal year ending (FYE) December 31, 20X2(Amounts determined as part of production plan and operating budget approved on November 5, 20X1)ActivityNormal,cost poolexpectedActivityi.e., NormallevelMOHNormal, planned per-unit consumption of cost driverexpectedDriver(volume) ofDriverProduct A-199Product B-299Product C-399Service departments:MOH costsActivity cost drivertypecost driverRateHoursCostHoursCostHoursCost Production scheduling$ 151,000No. of production runs (batches)Batch 750$ 201.33NA$ 201.33NA$ 201.33NA Quality inspectionNo. of production runs (batches)Batch#DIV/0!NA#DIV/0!NANA#DIV/0! M&E setupNo. of M&E Setup Dept. setup hoursBatch 8.3 – 5.5 – 2.1 – M&E maintenanceNo. of MHs in all production deptsUnit 45,000 1.8 – – – Building (1) 210,000No. of MHs in all production deptsUnit – 1.5 – – Plant administration(2) 312,000No. of DLHs in all production deptsUnit$ – $ – 1.0$ – $ 673,000Production departments:Supervision (Indirect labor): Casting$ 81,000Setup time (hours) in CastingBatch 980$ 82.65 1.5$ 123.98 1.2$ 99.18 0.8$ 66.12 Machining 100,000Setup time (hours) in MachiningBatch#DIV/0! 3.8#DIV/0! 3.0#DIV/0! 1.8#DIV/0! Assembly 85,000Number of DLHs in AssemblyUnit 10,500 0.5 – – 0.3 – Packing 51,000Number of DLHs in PackingUnit – 0.3 – – M&E costs (3): Casting 44,000Number of MHs in CastingUnit 9,000 0.3 – – – Machining 150,000Number of MHs in MachiningUnit – 0.7 – – Assembly 21,000Number of MHs in AssemblyUnit – – 0.2 – Packing 20,000Number of MHs in PackingUnit$ – $ – $ – $ 552,000Total normal, expected MOH costs$ 1,225,000MOH costs:(1) Building costs include depreciation, power, water, property taxes and insurance, and maintenance Total batch-related (above)#DIV/0!(2) Plant administration is comprised of: Normal, planned batch size (units) 25 – Supervisory costs of division (plant) V.P., which includes salary and related personnel costs Batch-related costs per unit#DIV/0! – Plant-level human resources and accounting staff, which includes salaries and related costs, Total unit-related (above) – and costs of telecommunications, office supplies and equipment, and contract payroll services.Total MOH cost per unit(3) Production dept M&E costs include depreciation, rent, refurbishments, property taxes and insuranceDirect materialDLHs: Direct labor hours (recorded work time of production employees)Direct labor (including “fringe”) 38.00M&E: Machinery and equipmentTotal cost per unit$ 38.00$ – $ – MHs: Machine hours (recorded operating time)MOH: Manufacturing overhead costs | |
