Healthy Hound. Inc.. makes two lines of dog food: (I) Basic Chunks, and (2) Cust

Question

Healthy Hound. Inc.. makes two lines of dog food: (I) Basic Chunks, and (2) Custom Cuts. The Basic Chunks line is a dry food that is processed almost entirely by an automated process. Custom. Cuts is a canned food made with real horsemeat. The slabs of meat are cut and trimmed by hand before being shoveled into a automated canning machine. Basic Chunks sells very.well and is priced significantly below competitive brands. Sales of Custom Cuts have been on the decline, as the company has failed to keep the brand price competitive. Other information concerning each product line is provided below Units for Basic Chunks refer to bags: units for Custom Cuts refer to cases. The company currently allocates manufacturing overhead to each product line on the basis of direct labor hours. Budgeted manufacturing overhead per month is $24,600. whereas budgeted direct labor hours amount to 2,500 per month. Healthy Hound recently hired a consultant to examine its cost accounting system. The consultant recommends that the company adopt activity-based costing to allocate manufacturing overhead She proposes that the following cost pools and cost drivers be used: Allocate manufacturing overhead costs to each product line using direct labor hours as a single cost driver. Allocate manufacturing overhead costs to each product line using the activity-based costing approach recommended by the consultant. Compute the total monthly manufacturing costs assigned to each product line when activity- based costing is used to allocate manufacturing overhead. Assume that the company sets selling prices as a fixed percentage above the total manufacturing costs allocated to each product line. Based on your results from parts a and b, discuss a possible reason why sales of the Custom Cuts product line are currently experiencing a decline. Discuss reasons why the company should adopt the recommendation of the consultant and implement an activity-based costing system.

Explanation / Answer

Basic Chunks Custom Cuts Total No. of units sold 50000 20000 Direct material cost per unit $2 4 direct labour per hour 12 12 Direct labour hours per unit 0.01 0.1 Total Direct labour hours 500 2000 2500 Basic Chunks Custom Cuts Total Ans 1 Manufacturing overhead per hour=24600/2500 A 9.84 Total Direct labour hours B 500 2000 2500 Total manufacturing cost A*B 4920 19680 24600 Ans 2 Ammount allocated Cost Pool Amount E Total driver Volume F Basic Chunks C Custom Cuts D Basic Chunks C/F*E Custom Cuts D/F*E Total Utilities $8,000 100000 kwh 90000 10000 $7,200 $800 $8,000 mainteanance 1000 200 mh 160 40 800 200 $1,000 Depreciation of plant & equip 15000 80000 sq feet 60000 20000 11250 3750 $15,000 Miscelleneous 600 2500 DLH 500 2000 120 480 $600 Total $24,600 $19,370 $5,230 $24,600 Ans 3 Total Manufacturing Cost as per ABC Basic Chunks Custom Cuts No. of units sold G 50000 20000 Direct material cost per unit H $2 4 direct labour per hour I 12 12 Direct labour hours per unit 0.01 0.1 Total Direct labour hours J 500 2000 2500 Direct material cost   G*H $100,000 $80,000 Direct labour Cost I*J 6000 24000 Manufacturing Overhead $19,370 $5,230 Total $125,370 $109,230 Ans 4 Basic Chunks Custom Cuts Total manufacturing cost as per traditional system 110920 123680 Total manufacturing cost as per ABC system $125,370 $109,230 Total manufacturing cost as per traditional system Direct material cost   G*H 100000 80000 Direct labour Cost I*J 6000 24000 Manufacturing Overhead 4920 19680 Total 110920 123680 Sales in custom cut is declining because there are more cost associated with it under traditional method thereby decreasing profit which makes it less profitable and sale price is not competitive as cost is more, so selling price is bit higher than market Ans 5 If Abc is implemented than the cost of manufacturing overhead is divided in more logical manner, so Custom Cut cost is less in ABC $109230 as compare to $123680, so competitive selling price can be given thereby increasing the sales volume

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