Question
The Tracy Corporation has a machining facility specializing in jobs for the aircraft-components market. Tracy's previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labour-hours). The indirect cost-allocation rate of the simple system for 2007 would have been $115 per direct manufacturing labour-hour.
Recently a team with members from product design, manufacturing and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows:
Activity Area cost-Allocation Base Cost-Allocation Rate
Materials handling Parts $0.40
Lathe work Lathe turns 0.20
Milling Machine-hours 20.00
Grinding Parts 0.80
Testing Units tested 15.00
Information-gathering technology has advanced to the point at which the data necessary for budgeting in these five (5) areas are collected automatically.
Two (2) representative jobs processed under the ABC system at the plant in the most recent period had the following characteristics:
Job 410 Job 411
Direct material cost per job $ 9,700 $59,900
Direct manufacturing labour cost per job $750 $11,250
Number of direct manufacturing labour-hours per job 25 375
Parts per job 500 2,000
Lathe turns per job 20,000 60,000
Machine-hours per job 150 1,050
Units per job (all units are tested) 10 200
(1) Compute the manufacturing cost per unit for each job under the previous simple job-costing system.
(2) Compute the manufacturing cost per unit for each job under the activity-based costing system.
(3) Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Tracy Corporation?
(4) How might Tracy Corporation use information from its ABC system to better manage its business?
