Maple Woods Inc. manufactures lounge chairs available in both a luxury and a standard model. The company has made the standard model for years; the luxury model was introduced several years ago to capture a new segment of the market. Since the introduction of the luxury model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the luxury model have been increasing rapidly. Overhead is applied to products on the basis of direct labour hours. At the beginning of the current year, management estimated that $5,921,376 in overhead costs would be incurred and the company would produce and sell 5,800 units of the luxury model and 42,880 units of the standard model. The luxury model requires 3.0 hours of direct labour time per unit, and the standard model requires 2.0 hours. Materials and labour costs follow: Direct materials cost per unit Direct labour cost per hour Luxury $176 17 Predetermined overhead rate Unit product cost of Luxury Unit product cost of Standard Required: 1. Compute the predetermined overhead rate using direct labour hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Standard $136 20 per DLH
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- Kimball Company has developed the following cost formulas: Materialusage:Ym=80X;r=0.95Laborusage(direct):Yl=20X;r=0.96Overheadactivity:Yo=350,000+100X;r=0.75Sellingactivity:Ys=50,000+10X;r=0.93 where X=Directlaborhours The company has a policy of producing on demand and keeps very little, if any, finished goods inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for production. The president of Kimball Company has recently implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. This policy was implemented because Kimballs industry is in a recession and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that minimally cover their variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Required: 1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an order for 20,000 units at 220 per unit. Should Kimball accept the order? (The order would not displace any of Kimballs regular orders.) 2. Explain the significance of the coefficient of correlation measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why or why not? 3. Suppose that a multiple regression equation is developed for overhead costs: Y = 100,000 + 100X1 + 5,000X2 + 300X3, where X1 = direct labor hours, X2 = number of setups, and X3 = engineering hours. The coefficient of determination for the equation is 0.94. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintainand perhaps increaseits market share, Maxwells management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of these components failed to work as intended, causing performance problems. Over the years, the company had increased its inspection activity of the final products. If a problem could be detected internally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had increased its warranty coverage; warranty work had been increasing over the years. David Haight, president of Maxwell Company, called a meeting with his executive committee. Lee Linsenmeyer, chief engineer; Kit Applegate, controller; and Jeannie Mitchell, purchasing manager, were all in attendance. How to improve the companys competitive position was the meetings topic. The conversation of the meeting was recorded as seen on the following page: DAVID: We need to find a way to improve the quality of our products and at the same time reduce costs. Lee, you said that you have done some research in this area. Would you share your findings? LEE: As you know, a major source of our quality problems relates to the poor quality of the parts we acquire from the outside. We have a lot of different parts, and this adds to the complexity of the problem. What I thought would be helpful would be to redesign our products so that they can use as many interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us. JEANNIE: I like this idea. It will simplify the purchasing activity significantly. With fewer parts, I can envision some significant savings for my area. Lee has shown me the designs so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We have too many suppliers. By reducing the number of different parts, we will need fewer suppliers. And we really dont need to use all the suppliers that produce the parts demanded by the new designs. We should pick suppliers that will work with us and provide the quality of parts that we need. I have done some preliminary research and have identified five suppliers that seem willing to work with us and assure us of the quality we need. Lee may need to send some of his engineers into their plants to make sure that they can do what they are claiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? And if so, how much can we expect to save? KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on how these actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key activities affected. I have also assembled some tentative information about activity costs. The table gives the current demand and the expected demand after the changes are implemented. With this information, we should be able to assess the expected cost savings. Additionally, the following activity cost data are provided: Purchasing parts: Variable activity cost: 30 per part number; 20 salaried clerks, each earning a 45,000 annual salary. Each clerk is capable of processing orders associated with 100 part numbers. Inspecting parts: Twenty-five inspectors, each earning a salary of 40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable activity cost: 25 per unit reworked (labor and parts). Warranty: Twenty repair agents, each paid a salary of 35,000 per year. Each repair agent is capable of repairing 500 units per year. Variable activity costs: 15 per product repaired. Required: 1. Compute the total savings possible as reflected by Kits handout. Assume that resource spending is reduced where possible. 2. Explain how redesign and supplier evaluation are linked to the savings computed in Requirement 1. Discuss the importance of recognizing and exploiting internal and external linkages. 3. Identify the organizational and operational activities involved in the strategy being considered by Maxwell Company. What is the relationship between organizational and operational activities?Maple Woods Inc. manufactures lounge chairs available in both a luxury and a standard model. The company has made the standard model for years; the luxury model was introduced several years ago to capture a new segment of the market. Since the introduction of the luxury model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the luxury model have been increasing rapidly. Overhead is applied to products on the basis of direct labour hours. At the beginning of the current year, management estimated that $6,512,836 in overhead costs would be incurred and the company would produce and sell 6,300 units of the luxury model and 44,680 units of the standard model. The luxury model requires 3.0 hours of direct labour time per unit, and the standard model requires 2.0 hours. Materials and labour costs follow: Direct materials cost per unit. Direct labour cost per hour Predetermined overhead rate Unit product cost…
- Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders. Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $1,929,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Management has determined that overhead costs are caused by three cost…Siegel Corporation manufactures a product avaílable in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to capture a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labour-hours. At the beginning of the current year, management estimated that $2,041,000 in overhead costs would be incurred and the company would produce and sell 5,000 units of the deluxe model and 32,000 units of the regular model. The deluxe model requires 2.5 hours of direct labour time per unit, and the regular model requires 1.2 hours. Materials and labour costs follow: Deluxe Regular $85 Direct materials cost per unit $125 Direct labour ost per hour 20 12 Required: 1. Compute…Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2,037,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Personal Commercial Total Direct materials $ 1,445,000 $ 620,000 $ 2,065,000 Direct labor 1,030,000 667,500 1,697,500 Management has determined that overhead costs are caused by three cost…
- Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2,023,500 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Personal Commercial Total Direct materials $ 1,444,200 $ 609,750 $ 2,053,950 Direct labor 1,029,000 657,250 1,686,250 Management has determined that overhead costs are caused by three cost…Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $1,902,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Personal $ 1,437,000 1,020,000 Commercial $ 517,500 565,000 Total $ 1,954,500 1,585,000 Management has determined that overhead costs are caused by three cost drivers. These…Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the Introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE belleves that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which Is representative, manufacturing overhead totaled $2,091,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Personal $ 1,448,200 1,034,000 Commercial $ 661,000 708,500 Total $ 2,109,200 1,742,500 Management has determined that overhead costs are caused by three cost drivers. These…
- Maggie Co manufactures two video consoles: handheld and home. The handheld are smaller and less expensive than the home consoles. Since the intro of the home model profits have been steadily declining. Management believes it is because of the inaccurate allocation of costs to the products, particularly since the volume of home console sales have been increasing. Upon investigation, you find that overhead cost is currently assigned to products based on their direct labor costs. Data showed that overhead last year was $1,440,000 based on 28,000 handheld consoles and 10,000 home consoles. Direct materials and direct labor costs were as follows: HANDHELD HOME TOTAL Direct Materials $ 750,000 $ 684,000 $ 1,434,000 Direct Labor 1,160,400 439,600 1,600,000 Management, after a careful study, has determined that overhead are caused by three cost drivers. These cost drivers and their costs for last year are as follows: COST DRIVER ASSIGNED COSTS…Silver Company manufactures a product that is available in both a complex model and a regular model. The company has manufactured the regular model for years. The complex model was introduced several years ago to tap a new segment of the market. Since introduction of the complex model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the complex model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of direct labour- hours. For the current year, the company has estimated that it will incur £900,000 in manufacturing overhead cost and produce 5,000 units of the complex model and 40,000 units of the regular model. The complex model requires two hours of direct labour time per unit, and the regular model requires one hour. Material and labour costs per unit are as follows: Model Complex Regular Direct material £40 £25 Direct labour 14 7 Required: a. Using…Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing. Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,262,000 based on production of 320,000 handheld consoles and 114,000 home consoles. Direct labor and direct materials costs were as follows. Handheld Home Total Direct labor $1,192,500 $385,000 $1,577,500 Materials 780,000 711,000 1,491,000 Management has determined that…