Hickory Grill Company manufactures two types of cooking grills: The Gas Cooker a
ID: 2568011 • 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
$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
ans 1 Gas Cooker Charcoal smoker Direct Material 72000 128000 Direct Labor 44000 56000 Manufacturing overhead 26600 106400 (13.3*2000) (13.3*8000) Total cost 142600 290400 Predetermined Overhead rate 133000/10000 13.3 Cost allocated Cost allocated ans 2 Gas cooker Charcoal smoker Activity Cost Cost Driver Estimated Driver Rate activity cost activity cost Materials acquisition& inspection $70,000 Direct materials cost 200000 0.35 72000 25200 128000 44800 Materials movement 19,600 Number of batch moves 70 280 50 14000 20 5600 Scheduling 43,400 Number of batch 280 155 180 27900 100 15500 Overhead cost 67100 65900 No. of units 2000 8000 Overhead cost per unit 33.55 8.2375 Gas Cooker Charcoal smoker Direct Material 72000 128000 Direct Labor 44000 56000 Manufacturing overhead 67100 65900 (13.3*2000) (13.3*8000) Total cost 183100 249900 ans 3 Conventuional method Gas Cooker Charcoal smoker Total cost 142600 290400 No. of units 2000 8000 Per unit cost 71.300 36.3 ABC Gas Cooker Charcoal smoker Total cost 183100 249900 No. of units 2000 8000 Per unit cost 91.55 31.24 ABC costing is better as it gives correct cost as the manufacturing overhead is allocated in a better way. ans 4 Sales (1000*71.3*125%) 89125 Less: product cost 71300 Increase in Net operating income 17825
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