Concept explainers
Curtis Rich, the cost accountant for Hi-Power Mower Company, recently installed activity- based costing at Hi-Power's St. Louis lawn tractor (riding mower) plant where three models—the 8-horsepower Bladerunner, the 12-horsepower Quickcut, and the 18-horsepower Supercut—are manufactured. Curtis's new product costs for these three models show that the company's traditional costing system had been significantly undercosting the 18-horsepower Supercut. This was due primarily to the lower sales volume of the Supercut compared to the Bladerunner and the Quickcut.
Before completing his analysis and reporting these results to management. Curtis is approached by his friend Ed Gray, who is the production manager for the 18-horsepower Supercut model. Ed has heard from one of Curtis's staff about the new product costs and is upset and worried for his job because the new costs show the Supercut to be losing, rather than making, money.
At first, Ed condemns the new cost system, where upon Curtis explains the practice of activity-based costing and why it is more accurate than the company's present system. Even more worried now, Ed begs Curtis, “Massage the figures just enough to save the line from being discontinued. You don't want me to lose my job, do you? Anyway, nobody will know.”
Curtis holds firm but agrees to recompute all his calculations for accuracy before submitting his costs to management.
Instructions
(a) Who are the stakeholders in this situation?
(b) What, if any. are the ethical considerations in this situation?
(c) What are Curtis's ethical obligations to the company? To his friend?
Want to see the full answer?
Check out a sample textbook solutionChapter 4 Solutions
Managerial Accounting, Binder Ready Version: Tools for Business Decision Making
Additional Business Textbook Solutions
Managerial Accounting (4th Edition)
Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition)
Financial Accounting
Horngren's Accounting (12th Edition)
Construction Accounting And Financial Management (4th Edition)
Managerial Accounting (5th Edition)
- Curtis Rich, the cost accountant for Hi-Power Mower Company, recently installed activitybasedcosting at Hi-Power’s St. Louis lawn tractor (riding mower) plant where three models—the 8-horsepower Bladerunner, the 12-horsepower Quickcut, and the 18-horsepower Supercut—aremanufactured. Curtis’s new product costs for these three models show that the company’straditional costing system had been significantly undercosting the 18-horsepower Supercut. Thiswas due primarily to the lower sales volume of the Supercut compared to the Bladerunner and theQuickcut. Before completing his analysis and reporting these results to management, Curtis isapproached by his friend Ed Gray, who is the production manager for the 18-horsepower Supercutmodel. Ed has heard from one of Curtis’s staff about the new product costs and is upset and worriedfor his job because the new costs show the Supercut to be losing, rather than making, money. Atfirst, Ed condemns the new cost system, whereupon Curtis explains the…arrow_forwardErgaster Corporation manufactures a variety of products. In the past, Ergaster has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Ergaster has decided to switch to an activity based costing system for manufacturing overhead costs using three activity cost pools. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year is as follows: (see image). Under the activity-based costing system, what would be the selling price of one unit of Model #36?arrow_forwardJim Franklin, the operations manager for Tires for Speed, was reviewing the product costs for his company’s performance tires. The current production schedule calls for the tires to be produced in batches of 1,000 tires. Between each batch, the production and packaging lines must be completely cleaned to remove all remnants of rubber before changing to the next batch. Currently, Tires for Speed makes 6 different tire models. Under the company’s activity-based costing system, each batch incurs direct setup and cleaning charges of $500. To reduce costs in the coming year, Jim plans to increase the minimum batch size to 2,000 tires, which will reduce the number of required setups. A total of 80,000 tires are produced each year. RequiredA. What effect will Jim’s decision to increase the batch size have on his total setup costs? What effect will Jim’s decision to increase the batch size have on the cost of a tire? C. Suppose two workers are required to run each batch. Each worker…arrow_forward
- Julio produces two types of calculator, standard and deluxe. The company is currently using a traditional costing system with machine hours as the cost driver but is considering a move to activity-based costing. In preparing for the possible switch, Julio has identified two cost pools: materials handling and setup. The collected data follow: Number of machine hours Number of material moves Number of setups Total estimated overhead costs are $332,860, of which $158,400 is assigned to the material handling cost pool and $174,460 is assigned to the setup cost pool. Required: 1. Calculate the overhead assigned to each product using the traditional cost system. 2. Calculate the overhead assigned to each product using ABC. Required 1 Required 2 Standard Model Deluxe Model 30,400 870 520 Complete this question by entering your answers in the tabs below. Standard Model Deluxe Model 25,400 570 90 Calculate the overhead assigned to each product using the traditional cost system. (Round the…arrow_forwardLauder Company manufactures and distributes various fixtures used primarily in new building construction. At the company's Bayside plant, Lauder produces two models of one widely used fixture designated by model names LC-20 and LC-50. Currently, the Bayside plant uses direct labor-hours to allocate manufacturing overhead costs to products. The vice president—manufacturing (VP-M) at Lauder has recently been considering updates to the company's costing systems as a way to ensure that managers had the best information available for decision making. However, rather than update throughout the entire firm, the VP—M and CFO agreed to test an ABC system. Because of its size and focus, the Bayside plant was selected for the experiment. An ABC study team, consisting of both plant and corporate employees was formed to propose an ABC system and compare the product costs with those reported by the current system. Based on the experiment, the executives at Lauder will decide whether to roll out the…arrow_forwardLauder Company manufactures and distributes various fixtures used primarily in new building construction. At the company's Bayside plant, Lauder produces two models of one widely used fixture designated by model names LC-20 and LC-50. Currently, the Bayside plant uses direct labor-hours to allocate manufacturing overhead costs to products. The vice president-manufacturing (VP-M) at Lauder has recently been considering updates to the company's costing systems as a way to ensure that managers had the best information available for decision making. However, rather than update throughout the entire firm, the VP-M and CFO agreed to test an ABC system. Because of its size and focus, the Bayside plant was selected for the experiment. An ABC study team, consisting of both plant and corporate employees was formed to propose an ABC system and compare the product costs with those reported by the current system. Based on the experiment, the executives at Lauder will decide whether to roll out the…arrow_forward
- Barbara, the manager of Metlock, is analyzing the company's MOH costs from last year. Metlock had always followed an actual costing system when determining the costs of its customizable telescopes. Barbara wondered if it would be better to switch to a normal costing system, as she had heard a number of people talking about that at an industry conference she attended the previous month. Since Metlock has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Barbara is analyzing: Budgeted MOH cost Actual MOH cost Budgeted machine hours Actual machine hours $426,240 Actual MOH rate $ 419,040 Determine the actual MOH rate and the budgeted MOH rate Metlock would have used last year under actual costing and normal costing, respectively. (Round answers to 2 decimal places, e.g. 52.75.) Budgeted MOH rate $ 96,000 108,000 /machine hour /machine hourarrow_forwardCPA Corp. manufactures variety of products. In the past, CPA Corp. has been using traditional costing system in which the predetermined overhead rate was 150% of direct labor. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, CPA Corp. has decided to switch to an activity-based costing system for manufacturing overhead cost using three activity cost pools. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for the next year are as follows: Activity Cost Pool Estimated Estimated Overhead Cost Activity Machine set-up 400 Number of P150,000 setups Quality Control 1,500 Number of 180,000 Other Overhead inspections Machine hours 30,000 480,000 Information (on a per units' basis) related to three popular products at CPA corp. are as follows: Product A Product B Product C Direct Material 400 540 310 Cost Direct Labor Cost 810 600 220 Number…arrow_forwardArklan Production is upgrading its manufacturing process from a manual process to a highly automated system. Management believes that the new system will result in greater efficiencies and a better finished product. Arklan is also working on a plan to downsize staff after the implementation of the new system. Arklan has used a traditional absorption costing system to calculate unit product costs for external financial reporting. In the past, Arklan has allocated its manufacturing overhead costs using a predetermined plant-wide overhead rate based on direct labor hours. The controller realizes that the new system may require changing the overhead allocation process. Management plans to take the opportunity to reconsider other improvements to the costing system. Identify and explain three benefits of using departmental overhead rates to allocate overhead costs. Explain the difference between absorption costing and variable costing. Identify which is more suitable for internal…arrow_forward
- Absorption costing is a widely used accounting method for costing and reporting on the total production cost of goods or services within an organization. It involves allocating both variable and fixed manufacturing costs to the cost of products. With that in mind, consider the following scenario: ABC Manufacturing Company produces electronic gadgets. In a given accounting period, the company manufactured and sold 10,000 units of their flagship gadget. The following data is available: Direct materials cost per unit: $50 Direct labor cost per unit: $30 Variable manufacturing overhead cost per unit: $20 Fixed manufacturing overhead cost for the period: $50,000 Selling and administrative expenses (all fixed): $30,000 Selling price per gadget: $200 Using absorption costing, calculate the following: A. The total manufacturing cost per unit of the electronic gadget. B. The total cost of goods manufactured during the accounting period. C. The ending inventory value of the manufactured gadgets.…arrow_forwardDK manufactures three products, W, X and Y. Each product uses the same materials and the same type of direct labour but in different quantities. The company currently uses a cost plus basis to determine the selling price of its products. This is based on full cost using an overhead absorption rate per direct labour hour. However, the managing director is concerned that the company may be losing sales because of its approach to setting prices. He thinks that a marginal costing approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly wage and has a three month notice period. Required: a) Given the managing director’s concern about DK’s approach to setting selling prices, discuss the advantages and disadvantages of marginal cost plus pricing AND total cost-plus pricing. The direct costs of the three products are shown below: Product W X Y Budgeted annual production (units) 15,000 24,000 20,000 $ per unit $ per unit $ per unit Direct materials…arrow_forwardDK manufactures three products, W, X and Y. Each product uses the same materials and the same type of direct labour but in different quantities. The company currently uses a cost plus basis to determine the selling price of its products. This is based on full cost using an overhead absorption rate per direct labour hour. However, the managing director is concerned that the company may be losing sales because of its approach to setting prices. He thinks that a marginal costing approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly wage and has a three month notice period.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education