Dakota Motors produces electric motors for commercial use. Until the end of 1994
ID: 2574473 • Letter: D
Question
Dakota Motors produces electric motors for commercial use. Until the end of 1994, only 2 models were produced, the “Standard” model” and the “Deluxe” model. The Deluxe model had more expensive components and raw materials, required more quality control and required more labor hours per unit to produce than the Standard model. Both models were produced in fairly large volume. Since 1994, in an attempt to grow its business, and in response to competitive pressures, Dakota Motors has begun producing many different varieties of electric motors, in addition to its regular models. These new models are tailor made to the needs of individual customers and are produced only on demand, and are typically low volume lines.
Dakota Motors has a simple (traditional) costing system which traces the costs of direct materials, components, and direct labor to each of its product lines. All support costs are assigned to product lines via a single plant wide overhead rate based on direct labor hours. Its volume of manufacturing activity has grown from 20,000 direct labor hours in 1994 to 30,000 direct labor hours in 1997.
Dakota Motors’ accounting system is reporting a rapid escalation in the costs per unit of producing the Standard and Deluxe models. Management is puzzled and vexed by these cost increases, since the prices of various production inputs (such as labor, raw materials, components, engineers, supervisors, etc.) have increased only marginally during these years, and the production methods for producing the Standard and Deluxe models have not changed.
Below, is data regarding support activities, annual support costs and driver volumes:
$100,000
$730,000
Assume that the production quantities and driver volumes for the Standard and Deluxe models have not changed between 1994 and 1997.
Questions:
1) Determine the total support costs assigned to the Standard model and to the Deluxe model in 1994 and in 1997 under the traditional costing system.
2) Calculate the cost driver rates and determine the support costs that would be assigned to the Standard, Deluxe and New models in 1997 under an activity based costing system. Be sure to display and label all your calculations.
3) Write a paragraph explaining to top management how the traditional costing system distorts product costs in Dakota Motors. Use the data on engineering hours and direct labor hours to quantitatively support your argument.
Support Costs Support Activity Cost driver 1994 1997 Supervision Direct labor hours $144,000 $220,000 Machine maintenance Machine hours $ 80,000 $140,000 Quality control # of inspections $ 40,000$100,000
Machine set ups # of setups $ 20,000 $120,000 Process engineering Engineering hours $ 10,000 $150,000 Total support costs $294,000$730,000
Explanation / Answer
Traditional method of allocation of manufacturing overhead based on predetermined overhead rate so it does not give correct allocation of overhead. ABC costing assigns factory/manufacturing overhead based on the activities identified and assigning cost to those activities according to the actual consumption by each activity. So this assigns the manufacturing overhead cost to the product in rational and logical manner. Hence traditional method distorts the product cost.
Standard product is undercost and Deluxe product is overcost and new model is undercost when we compre ABC with traditional system.
Support Activity 1994 1997 Supervision $144,000 $220,000 Machine maintenance $80,000 $140,000 Quality control $40,000 $100,000 Machine set ups $20,000 $120,000 Process engineering $10,000 $150,000 Total support costs $294,000 $730,000 Direct Labor hours 20000 30000 Support cost per direct labor hour 14.70 24.33 ans 1 1994 Standard Deluxe Direct labor hours 12000 8000 Support cost per direct labor hour 176400 194667 (12000*14.7) (8000*24.33) If rounded to two deicmal 176400 194640 ans 2 Support Costs Cost allocated Cost allocated Cost allocated 1997 No. of cost drivers Cost driver Rate R=S/C Standard activty A Estimated cost A*R Deluxe activty D Estimated cost D*R New Model N Estimated cost N*R Support Activity Supervision $220,000 30000 Direct labor hours $7.33 12000 $88,000 8000 $58,667 10000 $73,333 Machine maintenance $140,000 40000 Machine hours $3.50 14000 $49,000 12000 $42,000 14000 $49,000 Quality control $100,000 1400 # of inspections $71.43 400 $28,571 400 $28,571 600 $42,857 Machine set ups $120,000 120 # of setups $1,000 11 $11,000 9 $9,000 100 $100,000 Process engineering $150,000 2000 Engineering hours $75.00 120 $9,000 140 $10,500 1740 $130,500 Total support costs $730,000 $185,571 $148,738 $395,690 Standard Deluxe New model Support cost allocated $185,571 $148,738 $395,690 ans 3Related Questions
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