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Life Force Fitness, Inc., assembles and sells treadmills. Activity-based product information for each treadmill is as follows: All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive. Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hour per unit. Presently, the testing is done on the completed assembly; but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the treadmill during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter. a. Determine the new activity cost per unit under the rework improvement scenario. b. If management had the choice of doing the rework improvement in (a) or cutting the moving activity in half by improving the product flow, which decision should be implemented? Why?
Financial And Managerial Accounting
Solutions
Financial And Managerial Accounting
Life Force Fitness, Inc., assembles and sells treadmills. Activity-based product information for each treadmill is as follows:
All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive.
Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hour per unit. Presently, the testing is done on the completed assembly; but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the treadmill during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter.
a. Determine the new activity cost per unit under the rework improvement scenario.
b. If management had the choice of doing the rework improvement in (a) or cutting the moving activity in half by improving the product flow, which decision should be implemented? Why?
a.
Calculate the new activity cost per unit under the rework improvement scenario.
Explanation of Solution
Activity-based costing (ABC) method: The costing method which allocates overheads to the products based on factory overhead rate for each activity or cost object, according to the cost pooled for the cost drivers (allocation base).
Calculate the new activity cost per unit under the rework improvement scenario as follows:
| Activity | Activity base usage (hours per unit) | × | Activity rate per hour | = | Activity cost |
| Motor assembly | 1.50 | × | $20 | = | $30.00 |
| Finally assembly | 1.00 | × | $18 | = | $18.00 |
| Testing | 0.25 | × | $22 | = | $5.50 |
| Rework |
0.30 (1) | $22 | $6.60 | ||
| Moving | 0.20 | $15 | $3... |
b.
Identify the decision that the company should implement to improve the cost objective, and explain the reason.
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