Moriarity Manufacturing produces two product models: Regular and Special. Th e following information was taken from the accounting records for the fi rst quarter of 2010: Regular Special Total Units produced 80,000 20,000 100,000 Material cost $320,000 $180,000 $500,000 Labor cost $480,000 $140,000 $620,000 Moriarity currently uses a traditional cost accounting system where total overhead cost is assigned to products based on the total number of units produced. Company presi- dent Michael Moriarity has approached the controller, Betsy O’Connell, with concerns about sagging profi t margins and his inability to explain competitors’ pricing of similar products. O’Connell suggests that the company explore the possibility of a costing sys- tem that is based less on volume and more on identifying the consumption of resources by products (given manufacturing process activities). O’Connell identifi es the follow- ing overhead costs related to the production process: Wages and costs related to machine setups $ 360,000 Material handling costs 480,000 Quality control costs 120,000 Other overhead costs related to units produced 240,000 Total $1,200,000 During the quarter, there were 40 machine setups for production: 20 from Special to Regular and 20 from Regular to Special. O’Connell believes that the number of set- ups is the most appropriate cost driver of machine setup costs. With regard to mate- rial handling, the Special model uses more expensive and diffi cult-to-handle materials. O’Connell believes that material cost is the primary indicator of material handling costs. Each unit is hand-inspected by quality control personnel. Special units require a more time-consuming inspection because they are more complex and have more parts than Regular units. Quality control inspectors are paid $40 per hour; examination of payroll time sheets indicates that the inspectors spent 50 percent more hours inspecting Special units than Regular units. O’Connell believes that the remaining 30 percent of overhead costs are related to the number of units produced. a. Using a traditional, volume-based overhead rate, determine the overhead cost per unit of the Regular and Special units. b. Using the information provided by O’Connell, determine the overhead cost per unit of the Regular and Special Units using an activity-based costing system. c. What is the total per-unit cost of the Regular and Special Units under each over- head costing system? d. Compute the amount of product cross-subsidization per unit that was taking place under the traditional costing system. e. Identify potential non-value-added activities in Moriarity’s current manufacturing system. f. What suggestions would you have for Michael Moriarity to improve the competi- tiveness of the company’s products in the marketplace?
47. LO.1, LO.3–LO.5 (Activity analysis, ABC; pricing; cost drivers) Moriarity
Manufacturing produces two product models: Regular and Special. Th e following
information was taken from the accounting records for the fi rst quarter of 2010:
Regular Special Total
Units produced 80,000 20,000 100,000
Material cost $320,000 $180,000 $500,000
Labor cost $480,000 $140,000 $620,000
Moriarity currently uses a traditional cost accounting system where total overhead cost
is assigned to products based on the total number of units produced. Company presi-
dent Michael Moriarity has approached the controller, Betsy O’Connell, with concerns
about sagging profi t margins and his inability to explain competitors’ pricing of similar
products. O’Connell suggests that the company explore the possibility of a costing sys-
tem that is based less on volume and more on identifying the consumption of resources
by products (given manufacturing process activities). O’Connell identifi es the follow-
ing overhead costs related to the production process:
Wages and costs related to machine setups $ 360,000
Material handling costs 480,000
Quality control costs 120,000
Other overhead costs related to units produced 240,000
Total $1,200,000
During the quarter, there were 40 machine setups for production: 20 from Special to
Regular and 20 from Regular to Special. O’Connell believes that the number of set-
ups is the most appropriate cost driver of machine setup costs. With regard to mate-
rial handling, the Special model uses more expensive and diffi cult-to-handle materials.
O’Connell believes that material cost is the primary indicator of material handling costs.
Each unit is hand-inspected by quality control personnel. Special units require a more
time-consuming inspection because they are more complex and have more parts than
Regular units. Quality control inspectors are paid $40 per hour; examination of payroll
time sheets indicates that the inspectors spent 50 percent more hours inspecting Special
units than Regular units. O’Connell believes that the remaining 30 percent of overhead
costs are related to the number of units produced.
a. Using a traditional, volume-based overhead rate, determine the overhead cost per
unit of the Regular and Special units.
b. Using the information provided by O’Connell, determine the overhead cost per unit
of the Regular and Special Units using an activity-based costing system.
c. What is the total per-unit cost of the Regular and Special Units under each over-
head costing system?
d. Compute the amount of product cross-subsidization per unit that was taking place
under the traditional costing system.
e. Identify potential non-value-added activities in Moriarity’s current manufacturing
system.
f. What suggestions would you have for Michael Moriarity to improve the competi-
tiveness of the company’s products in the marketplace?
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