Catch, Inc., is a designer and manufacturer of backpacks and purses. The equipment must be switched over to a new setting and set up to prepare for each new batch of products. This setup process is very technical and requires a highly qualified team of engineers. Setting up each product requires different efforts. Here is the information about manufacturing costs for one month in the year 2020: Direct Manufacturing Costs: Purses Backpacks Direct Materials $379,290 $412,920 Direct Manufacturing Labor $98,000 $120,000 Manufacturing Overheads: Setup Costs $66,000 Machine-Related Costs $384,000 (Utilities, Maintenance, etc.) Factory Rent $100,000 Here is some information on potential allocation bases/cost drivers for overheads cost: Purses Backpacks Number of batches 120 60 Setup Time 0.5 hours/batch 4 hours/batch Machine-Hours 2,600 1,400 Number of bags 3,600 6,000 Production area used 4,000 sq. ft. 6,000 sq. ft. Q1: Using the above information, choose allocation bases for each overhead, allocate overhead, and calculate the production costs of each product line per unit. When choosing allocation bases, explain your choice of allocation base for each cost. Q2: Suppose you find out that 1,000 sq. ft. space in the Backpacks area is lying unused. Will the overheads allocate to Backpacks and Purses change, and if so by how much? By how much will Catch, Inc.’s period costs change as a result? Q3: Once all the manufacturing overheads have been allocated to come up with production costs for the income statement that needs to go out to shareholders, the management now turns their attention to the non-manufacturing overheads. The most important of the non-manufacturing overheads is administration costs. The management discusses how difficult it is to find a good allocation base for administration costs. The management team considered three alternative allocation bases: production area used, number of bags made, and machine hours worked. To decide between these three, the management team asks for some additional information about each allocation base in recent six months: July Aug Sept Oct Nov Dec Administration Cost $4,000 $5,000 $8,000 $8,000 $10,000 $10000 Total area used 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. # of phone calls received 500 600 900 1,100 1,300 1,200 # of Invoice Issued 150 187.50 300 305 375 380 Required: Which of these allocation bases would you choose to allocate administration costs across the # of phone calls received or # of Invoice Issued? Why would you choose it? Q4: Another important non-manufacturing overhead is the warehouse cost. This is the cost paid to a third-party warehouse owner to house all the finished bags, in crates, while they await pickup and shipping to retailers. Usually, this cost is considered a distribution cost, and since that is a non-manufacturing cost, these costs are expensed in the period incurred. Warehousing costs this year are $3,640,000 for the backpacks and $2,000,000 for the purses. The company made 130,000 backpacks this year and sold 120,000. The company made and sold 150,000 purses this year. This year, however, the management says: “They are under pressure this year to meet the earning targets that our investors have set for us. Can’t you justify reclassifying these warehousing costs as a product cost instead of a period cost? After all, these are directly related to our product.” Required: IF you were to reclassify the warehousing costs as a product cost instead of a period cost, would that have any effect on reported income for this year? Explain why or why not, with supporting calculations where needed.
Catch, Inc., is a designer and manufacturer of backpacks and purses. The equipment must be switched over to a new setting and set up to prepare for each new batch of products. This setup process is very technical and requires a highly qualified team of engineers. Setting up each product requires different efforts.
Here is the information about
Direct Manufacturing Costs:
Purses Backpacks
Direct Materials $379,290 $412,920
Direct Manufacturing Labor $98,000 $120,000
Manufacturing
Setup Costs $66,000
Machine-Related Costs $384,000
(Utilities, Maintenance, etc.)
Factory Rent $100,000
Here is some information on potential allocation bases/cost drivers for overheads cost:
Purses Backpacks
Number of batches 120 60
Setup Time 0.5 hours/batch 4 hours/batch
Machine-Hours 2,600 1,400
Number of bags 3,600 6,000
Production area used 4,000 sq. ft. 6,000 sq. ft.
Q1: Using the above information, choose allocation bases for each overhead, allocate overhead, and calculate the production costs of each product line per unit. When choosing allocation bases, explain your choice of allocation base for each cost.
Q2: Suppose you find out that 1,000 sq. ft. space in the Backpacks area is lying unused.
Will the overheads allocate to Backpacks and Purses change, and if so by how much?
By how much will Catch, Inc.’s period costs change as a result?
Q3: Once all the manufacturing overheads have been allocated to come up with production costs for the income statement that needs to go out to shareholders, the management now turns their attention to the non-manufacturing overheads.
The most important of the non-manufacturing overheads is administration costs. The management discusses how difficult it is to find a good allocation base for administration costs. The management team considered three alternative allocation bases: production area used, number of bags made, and machine hours worked. To decide between these three, the management team asks for some additional information about each allocation base in recent six months:
July Aug Sept Oct Nov Dec
Administration Cost $4,000 $5,000 $8,000 $8,000 $10,000 $10000
Total area used 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft. 10,000 Sq. ft.
# of phone calls received 500 600 900 1,100 1,300 1,200
# of Invoice Issued 150 187.50 300 305 375 380
Required: Which of these allocation bases would you choose to allocate administration costs across the # of phone calls received or # of Invoice Issued? Why would you choose it?
Q4: Another important non-manufacturing overhead is the warehouse cost. This is the cost paid to a third-party warehouse owner to house all the finished bags, in crates, while they await pickup and shipping to retailers. Usually, this cost is considered a distribution cost, and since that is a non-manufacturing cost, these costs are expensed in the period incurred. Warehousing costs this year are $3,640,000 for the backpacks and $2,000,000 for the purses. The company made 130,000 backpacks this year and sold 120,000. The company made and sold 150,000 purses this year.
This year, however, the management says: “They are under pressure this year to meet the earning targets that our investors have set for us. Can’t you justify reclassifying these warehousing costs as a product cost instead of a period cost? After all, these are directly related to our product.”
Required: IF you were to reclassify the warehousing costs as a product cost instead of a period cost, would that have any effect on reported income for this year? Explain why or why not, with supporting calculations where needed.
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