[jayhot]

Smithers Inc produces two types of gadgets, the Standard and the Deluxe. Stan Smithers, the president of the company was reviewing the latest summary of unit costs and revenues and was not happy with the results for the standard gadget (see exhibit 1). The results showed that the gross margin on the standard was significantly lower than the gross margin for the deluxe unit. Mr. Smithers was wondering if it was time to drop the standard product and compete solely in the specialty market.

The gadgets are produced from a combination of materials in a single manufacturing facility. The basic product is the standard gadget. It has been a staple of the company for years and has sold well in the past. Sales in the current year had not declined from previous years. Last year the company introduced the deluxe gadget for special orders. The deluxe gadget differs from the standard gadget in that they are made to customer specifications and may vary in size and use higher quality materials. The process for the deluxe gadget is much more automated, compared to the standard gadget.

The sales manager told Mr. Smithers that the specialty business seemed to be increasing and that Smithers’ competitors were not matching the selling product for the specialty gadget.

Smithers use a traditional costing system. Manufacturing overhead is applied to products on the basis of direct labour hours. The rate of $30.60 per direct-labour hour is determined by dividing the total manufacturing overhead cost for a month by the direct labour hours. Total manufacturing overhead for the current period is estimated to be $172,125. Product cost information is provided in exhibit two.

Other information about the company is provided below:
• Standard gadgets are produced in batches of 200 units and deluxe gadgets are produced in batches if 100 units. Thus, the company does 50 setups for the standard gadgets and 25 setups for the specialty gadgets. A setup for the standard gadget requires one hour of time, whereas the setup for the deluxe requires two hours of time.
• All gadgets are inspected to ensure quality standards are met. A total of 375 hours of inspection time is spent on the standard gadget and 425 hours of inspection time is spent on the deluxe gadget each month.
• A standard gadget requires 0.90 machine hours and a deluxe gadget requires 0.80 hours of machine time.



• The company is considering the use of activity-based costing as an alternative to its traditional system. Since these unit product costs will be used for external financial reporting purposes, all manufacturing overhead costs are to be allocated to products and non-manufacturing costs are to be excluded from product costs. The activity-based costing system has already been designed and costs allocated to the activity cost pools. This information is contained in exhibit three.


Required:

1. Using activity-based costing, determine the amount of manufacturing overhead cost that would be applied to each standard gadget and each deluxe gadget.
2. Using the data computed in part 1, and the other data from the case as needed, determine the unit product cost of each product line from the perspective of the activity-based costing system.
3. Within the limitations of the data that have been provided, evaluate the president’s concern about profitability of the two products. Would you recommend that the company shift production entirely to the production of the deluxe gadget?
4. Why do you suppose the competition has not tried to meet our price on the deluxe gadget?


Exhibit One
Summary of Unit Costs and Revenues


Standard Deluxe
Selling price per unit $57.00 $63.00
Unit product cost 54.30 38.40
Gross margin per unit $2.70 $28.60













Exhibit Two
Product Manufacturing Costs

Standard Deluxe
Units produced each month 10,000 2,500

Direct materials $30.00 $26.25
Direct labour 9.00 4.50
Manufacturing overhead 15.60 7.65
$54.30 $38.40

The standard gadget requires 0.5 direct labour hours; the deluxe gadget requires .25 direct labour hours.


Exhibit Three
Activity-Based Costing Information


Activity Cost Pool
Activity Measure Estimated Overhead Cost
Purchasing Number of orders $22,100
Material-handling Number of receipts 23,700
Production orders & setup Setup hours 33,200
Inspection Inspection-hours 22,080
Frame assembly Assembly-hours 15,605
Machine related Machine-hours 55,440
$172,125

Activity Measure Standard Deluxe
Number of orders 82 18
Number of receipts 180 120
Setup hours ? ?
Inspection hours ? ?
Assembly hours 900 700
Machine hours ? ?
Can't figure out how to do it, please help

[morgaine300]

Activity Measure Standard Deluxe
Number of orders 82 18
Number of receipts 180 120
Setup hours ? ?
Inspection hours ? ?
Assembly hours 900 700
Machine hours ? ?
can't figure out how to do it, please help

The problem gives the number of setups, inspection hours and machine hours per unit. They also give the total production (i.e. units produced.)

When doing these long cost problems, you have to learn how to read it thoroughly and dig the numbers out. They are all right there if you will look for them.

After that I would expect to see some kind of attempt on your part to do the problem. We are not here just to solve it for you, and it's very difficult to 'drop hints' on something very long and involved like this.

[Joshsmith5391]

I have the same assignment, just different numbers and names. I'm trying to do question 1, where it asks for Manufacturing Overhead. The book has examples for Traditional Product Costing, but not for Activity-Based Costing. I'm having problems finding a relevant example that shows the word "Manufacturing Overhead" under Activity-Based Costing.