Problem
Outdoor Adventures is a contract provider that produces engine parts for small vehicles such as John Deere's Gator(pictured). Outdoor Adventures produces 2 parts, Part A and Part B. The competition is fierce among the contractors so in order to stay viable in the market, Outdoor Adventures needs to have a very accurate understanding of its costs.
Currently in the marketplace, Part A is experiencing extraordinary competition. On the other hand, Part B seems to have a corner on the market. Because of this, Outdoor Adventures is considering dropping Part A to focus solely on Part B.
The market place situation, coupled with the fact that the product line manager for Part A is very skeptical of the $29.88(17.06 +12.82) cost reported to produce Part A, make the controller, Jackie Chen, very concerned there might be some problem with the current cost system.
Jackie Chen has expressed his concern to the CFO, Lois Lane. Lois has instructed Jackie to conduct a thorough cost study to see if Part A's product manager skepticism has some validity.
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Part A
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Part B
|
|
Production Units
|
100,000
|
21,000
|
|
Selling Price
|
$58
|
$46
|
|
Overhead per unit(base on DL hours)
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$12.82
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$6.10
|
|
Materials and direct labor cost per unit
|
$17.06
|
$12.52
|
|
Number of production runs
|
20
|
40
|
|
Number of purchasing and receiving orders processed
|
80
|
200
|
|
Number of machine hours
|
25,500
|
12,000
|
|
Number of direct labor hours
|
50,000
|
5,000
|
|
Number of engineering hours
|
10,000
|
10,000
|
|
Number of material moves
|
100
|
80
|
Outdoor Adventures has monthly overhead(just manufacturing) of $1,410,000, which is divided into the following activity cost pools:
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Setup costs
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$60,000
|
|
Machine costs
|
350,000
|
|
Purchasing and Receiving costs
|
420,000
|
|
Engineering Costs
|
400,000
|
|
Materials handling cost.
|
180,000
|
|
Total
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$1,410,000
|
Required:
1. Calculate Outdoor Adventures' current company-wide overhead rate based on direct labor hours.
2. Verify the calculation of overhead cost per unit of $12.82 for Part A and $6.10 for Part B.
3. Calculate the manufacturing overhead costs for for each part using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products.
4. Comment on Outdoor Adventures' current cost system and the reason the company is facing fierce competition for Part A but little competition for Part B. Also address the product line manager's skepticism.