Problem - Activity Based Costing and Management
Sue, the corporate controller, has, thus, far been impressed with your performance at the Charlotte plant. She thinks it is time for the Company to move forward with a more precise costing system. She meets with you to discuss if you are able to implement Activity Based Costing at Charlotte. Being on the fast-track, you are eager to demonstrate that you should be the successor to Sue and agreed to pilot ABC at Charlotte. You have gathered the following interim data for envelopes and cups.
Total production overhead $5,017,500
Envelopes Cups
Direct costs $8,250,000 $8,750,000
Units produced 1,500,000 350,000
Machine hours 200,000 50,000
Direct labor hours 34,500 153,625
Number of quality inspections 1,000 6,500
Revenue generated by the two products $15,000,000 $16,800,000
You have determined, using ABC, that overhead can be assigned to separate cost pools specifically:
Pool 1 = $1,260,000 using machine hours as the cost driver
Pool 2 = $2,257,500 using direct labor hours as the cost driver
Pool 3 = $1,500,000 using the number of quality inspections as the cost driver
Historically, Charlotte has used a single plant-wide rate, machine hours for the allocation of overhead.
Required:
1. What are the steps in ABC implementation?
2. Provide at least 3 possible non-value added activities that the Charlotte facility may be experiencing?
3. Using the old plant-wide rate calculate gross profit and the rate of return on the two products.
4. Using the new cost pools and cost drivers calculate gross profit and the rate of return of the two products.
5. Prepare a memo to Sue discussing what challenges that may be encountered by the Charlotte facility and how to overcome them.