Project # 4- ACCT122 Spring 2013_Carry All_Activity Based Costing

Project # 4- ACCT122 Spring 2013
Due April 25, 2013.
This case compares the traditional
single overhead allocation rate to the activity based costing system.
ANALYTICAL THINKING
“A dollar of gross profit per
briefcase? That’s ridiculous!” roared
Art Dejans, president of Carry All, Inc.
“Why do we go on producing those standard briefcases when we’re able to
make over $15 per unit on our specialty items?
Maybe it’s time to get out of the standard line and focus the whole
plant on specialty work.”
Mr.
Dejans is referring to a summary of unit costs and revenues that he had just
received from the company’s Accounting Department:

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Carry All
produces briefcases from leather, fabric, and synthetic materials in a single
plant. The basic product is a standard
briefcase that is made from leather lined with fabric. The standard briefcase is a high quality item
and has sold well for many years.
Last
year, the company decided to expand its product line and produce specialty
briefcases for special orders. These
briefcases differ from the standard in that they vary in size, they contain the
finest synthetic materials, and they are imprinted with the buyer’s name. To reduce labor costs on the specialty
briefcases, most of the cutting and stitching is done by automated
machines. These machines are used to a
much lesser degree in the production of standard briefcases.
“I
agree that the specialty business is looking better and better.” replied Sally
Henrie, the company’s marketing manager.
“And there seems to be plenty of specialty work out there, particularly
since the competition hasn’t been able to touch our price. Did you know that Armor Company, our biggest
competitor, charges over $50 a unit for its specialty items? Now that’s what I call gouging the customer!”
A
breakdown of the manufacturing cost for each of Carry All’s product lines is
given below:

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Manufacturing
overhead is applied to products on the basis of direct labor-hours. The rate of $16 per direct labor-hour is
determined by dividing the total manufacturing overhead cost for a month by the
direct labor-hours:

Manufacturing overhead
cost: $90,000
Direct
labor-hours: 5,625 = $16 per
direct-labor hour

The following additional information is
available about the company and its products:
a) Standard briefcases are produced in batches of 200 units, and
specialty briefcases are produced in batches of 25 units. Thus, the company does 50 setups for the
standard items each month and 100 setups for the specialty items. A setup for the standard items requires one
hour of time, whereas a setup for the specialty items requires two hours of
time.
b) All briefcases are inspected to ensure that quality standards are
met. A total of 300 hours of inspection
time is spent on the standard briefcases and 500 hours of inspection time is
spent on the specialty briefcases each month.
c) A standard briefcase requires 0.5 hours of machine time, and a
specialty briefcase requires 2.0 hours of machine hours.
d) The company is considering the use of activity-based costing as an
alternative to its traditional costing system for computing unit product
costs. Since these unit product costs
will be used for external financial reporting, all manufacturing overhead costs
are to be allocated to products and nonmanufacturing costs are to be excluded
from product costs. The activity-based
costing system has already been designed and costs allocated to the activity
cost pools. The activity cost pools and
activity measures are detailed below:

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I have
included a spreadsheet to assist you in the setup of this problem. Also, this might seem like a lot of information,
but analyze the data and try not to read too much into the problem!

REQUIRED:
1. Using activity-based costing, determine the amount of manufacturing
overhead cost that would be applied to each standard briefcase and each
specialty briefcase.

2. Using the date computed in (1) above and other data from the case as
needed, determine the unit product cost of each product line from the
perspective of the activity-based costing system.

3. Within the limitations of the data that have been provided, evaluate
the president’s concern about the profitability of the two product lines. Would you recommend that the company shift
its resources entirely to production of specialty briefcases? Explain.

4. Sally Henrie state that “the competition hasn’t been able to touch
our price” on specialty business. Why do
you suppose the competition hasn’t been able to touch CarryAll’s price?