Hickory Grill Company manufactures two types of cooking grills: The Gas Cooker a
ID: 2567962 • Letter: H
Question
Hickory Grill Company manufactures two types of cooking grills: The Gas Cooker and the Charcoal Smoker. The Cooker is a premium product sold to upscale outdoor shops; the Smoker is sold at major discount stores. Following information is pertaining to the manufacturing costs for the month of January:
Gas Cooker Charcoal Smoker
Units 2,000 8,000
Number of batches 50 20
Number of batch moves 180 100
Direct materials $72,000 $128,000
Direct Labor $44,000 $56,000
Details of manufacturing overhead for the month of January consisted of:
Activity Cost Cost Driver
Materials acquisition& inspection $70,000 Direct materials cost
Materials movement 19,600 Number of batch moves
Scheduling 43,400 Number of batch
Total $133,000
In addition, the facility level costs (plant maintenance, rent and supervisory salaries) for the month was $17,000.
Assuming that all the manufacturing overhead, using the conventional method, is assigned on the basis of number of units produced. For the month of January, what is the total cost of manufacturing the Gas Cooker? And the Charcoal Smoker?
Assuming that all manufacturing overhead is assigned on the basis of activity-based costing. For the month of January, what is the total cost of manufacturing the Gas Cooker? And the Charcoal Smoker? The controller has suggested that the facility-level costs can still be allocated using the number of units produced.
What is the per unit cost of Gas Cooker and Charcoal Smoker under the conventional and the activity-based costing method? Explain why the per unit cost changed under the two costing methods. Which method will you recommend to the management of Hickory Grill Company?
Hickory Farm operates in a competitive market and prices its product with a 25% markup over cost, determined using the conventional method. Assuming that the Hickory is still operating within the relevant range, what will be the impact of selling additional 1,000 units of Gas Cooker on the overall profitability of the company?
Explanation / Answer
Conventional Method :
Predetermined Overhead Rate = Total Overhead Cost / Number of Units Produced = $ ( 133,000 + 17,000) / ( 2,000 + 8,000) = $ 15 per unit.
For the month of January : Traditional Costing
For the month of January : Activity Based Costing
Per Unit Cost : Traditional Costing
Per Unit Cost : Activity Based Costing
The per unit cost changed because while a single cost pool and a single cost driver was being used for allocating manufacturing overhead in the conventional method, multiple cost pools, based on activities used, and multiple cost drivers have been used in ABC. The premise in ABC is that the products consume activities, and the activities in turn consume resources.
Activity based costing is recommended for Hickory Grill Company. Using conventional costing method,while the company was sacrificing profitability for the Gas Cooker on the one hand, it was sacrificing market share for the Charcoal Smoker on the other.
If Hickory prices its products at 25 % markup on cost ( coventional method) , then price of Gas Cooker = $ 73 x 125 % = $ 91.25.
But cost per unit under ABC is $ 94.10.
Therefore, loss per unit = $ 91.25 - $ 94.10 = $ 2.85.
Loss on selling 1,000 Gas Cooker at price based on conventional costing = $ 2.85 x 1,000 = $ 2,850.
The impact is a reduction in overall profitability by $ 2,850.
Gas Cooker Charcoal Smoker $ $ Direct Materials 72,000 128,000 Direct Labor 44,000 56,000 Manufacturing Overhead 30,000 120,000 Total Manufacturing Cost $ 146,000 $ 304,000Related Questions
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