Hampshire has always produced stick umbrellas. However, it is considering expand
ID: 2655636 • Letter: H
Question
Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:
Stick
Collapsible
Units Sold
60,000
3,000
Selling Price
$12.50
$14.00
Direct Material Cost per Unit
$3
$3.10
Direct Labor Cost per Hour
$7.50
$8.00
Variable Manufacturing Overhead
$0.40
$0.40
Variable Selling Costs
$1.10
$1.10
Labor Hours per Unit
0.2
0.2
Sales Orders
120
1
Purchase Orders
50
3
Production Runs
45
6
Material Moves
86
10
Machine Setups
130
6
Machine Hours
525
32
Inspections
200
10
Shipments
60
3
Table 1: Direct Cost Information and Activities
Activity
Activity Cost
Activity Cost Driver
Order Processing
$35,000
Number of Sales Orders
Purchasing
$36,000
Number of Purchase Orders
Material Handing
$28,000
Material Moves
Machine Setup
$14,000
Machine Setups
Production
$99,000
Production Runs
Assembly
$80,000
Machine Hours
Inspecting
$11,000
Number of Inspections
Shipping
$7,500
Number of Shipments
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.
Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:
1.Calculate the allocation rates for each cost driver using ABC.
2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.
3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.
Stick
Collapsible
Units Sold
60,000
3,000
Selling Price
$12.50
$14.00
Direct Material Cost per Unit
$3
$3.10
Direct Labor Cost per Hour
$7.50
$8.00
Variable Manufacturing Overhead
$0.40
$0.40
Variable Selling Costs
$1.10
$1.10
Labor Hours per Unit
0.2
0.2
Sales Orders
120
1
Purchase Orders
50
3
Production Runs
45
6
Material Moves
86
10
Machine Setups
130
6
Machine Hours
525
32
Inspections
200
10
Shipments
60
3
Explanation / Answer
Requirement 1 Activity Total Costs Quantity of Cost Allocation Base Overhead Allocation Rate Order Processing $35,000 121 $289.26 Purchasing $36,000 53 $679.25 Material Handing $28,000 96 $291.67 Machine Setup $14,000 136 $102.94 Production $99,000 51 $1,941.18 Assembly $80,000 557 $143.63 Inspecting $11,000 210 $52.38 Shipping $7,500 63 $119.05 Requirement 2 Stick Umbrella Collapsible Umbrella Traditional Costing Stick Umbrella Collapsible Umbrella Total Revenues $750,000.00 $42,000.00 $792,000.00 Direct Materials $180,000 $9,300 $189,300.00 Direct Labor $90,000.00 $4,800.00 $94,800.00 Variable Overhead $24,000.00 $1,200.00 $25,200.00 Variable Selling Costs $66,000.00 $3,300.00 $69,300.00 Allocated Fixed Overhead $295,714.29 14785.71 $310,500.00 Total Costs $655,714.29 33385.71 $689,100.00 Operating Income $94,285.71 $8,614.29 $102,900.00 Operating Income % 12.57142857 20.51020408 12.99 Per Unit Operating Income $1.57 $2.87 Activity-Based Costing Requirement 3 Stick Umbrella Collapsible Umbrella Total Revenues $750,000 $42,000 $792,000 Direct Materials $180,000 $9,300 $189,300 Direct Labor $90,000 $4,800 $94,800 Variable Overhead $24,000 $1,200 $25,200 Variable Selling Costs $66,000 $3,300 $69,300 Order Processing Costs $34,711 $289 $35,000 Purchasing Costs $33,963 $2,038 $36,000 Material Handing Costs $25,084 $2,917 $28,000 Machine Setup Costs $13,382 $618 $14,000 Production Costs $87,353 $11,647 $99,000 Assembly Costs $75,405 $4,595 $80,000 Inspecting Costs $10,476 $524 $11,000 Shipping Costs $7,143 $357 $7,500 Total Costs $647,516 $41,584 $689,100 Operating Income $102,484 $416 $102,900 Operating Income % 13.66 0.99 12.99 Per Unit Operating Income $1.71 $0.14 Requirement 4 Costs per Unit Stick Umbrella Collapsible Umbrella Traditional $10.93 11.13 ABC $10.79 $13.86 Difference $0.14 ($2.73) Calculation of Labour Hours (Working Note) Labor Hours per Unit 0.2 0.2 Units Sold 60,000 3,000 Total $12,000.00 $600.00 $12,600.00
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