Question: Cost hierarchy. Roberta, Inc., manufactures elliptical machines for several well-known companies. The machines differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017:
a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $935,000
b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $650,000
c. Cost of indirect materials, $234,000
d. Costs incurred to set up machines each time a different product needs to be manufactured, $392,000
e. Designing processes, drawing process charts, and making engineering process changes for products, $236,900
f. Machine-related overhead costs such as depreciation, maintenance, and production engineering, $865,000 (These resources relate to the activity of running the machines.)
g. Plant management, plant rent, and plant insurance, $498,000
1. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facilitysustaining. Explain each answer.
2. Consider two types of elliptical machines made by Roberta, Inc. One machine, designed for professional use, is complex to make and is produced in many batches. The other machine, designed for home use, is simple to make and is produced in few batches. Suppose that Roberta needs the same number of machinehours to make each type of elliptical machine and that Roberta allocates all overhead costs using machinehours as the only allocation base. How, if at all, would the machines be miscosted? Briefly explain why.
3. How is the cost hierarchy helpful to Roberta in managing its business?