(ABC; decision making) Casito Corp. manufactures multiple types of products; however, most of the company’s sales are from Product #347 and Product #658. Product #347 has been a standard in the industry for several years; the market for this product is competitive and price sensitive. Casito plans to sell 65,000 units of Product #347 in 2011 at a price of $150 per unit. Product #658 is a recent addition to Casito’s product line. This product incorporates the latest technology and can be sold at a premium price; the company expects to sell 40,000 units of this product in 2011 for $300 per unit.
Casito’s management group is meeting to discuss 2011 strategies, and the current topic of conversation is how to spend the sales and promotion budget. The sales man ager believes that the market share for Product #347 could be expanded by concentrating Casito’s promotional efforts in this area. However, the production manager wants to target a larger market share for Product #658. He says, “The cost sheets I get show that the contribution from Product #658 is more than twice that from Product #347.
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I know we get a premium price for this product; selling it should help overall profit ability.” Casito has the following costs for the two products:
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Product #347
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Product #658
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Direct material
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$80
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$140
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Direct labor
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1.5 hours
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4.0 hours
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Machine time
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0.5 hours
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1.5 hours
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Variable manufacturing overhead is currently applied on the basis of direct labor hours. For 2011, variable manufacturing overhead is budgeted at $1,120,000 for a total of 280,000 direct labor hours. The hourly rates for machine time and direct labor are $10 and $14, respectively. Casito applies a material handling charge at10 percent of material cost; this material handling charge is not included in variable manufacturing overhead. Total 2011 expenditures for materials are budgeted at$10,800,000.
Marc Alexander, Casito’s controller, believes that before management decides to allocate marketing funds to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Alexander has prepared the following schedule to help the management group understand this concept:
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Budgeted
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Annual Activity for
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Cost
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Cost Driver
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Cost Driver
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Material overhead
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Procurement
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$ 400,000
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Number of parts
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4,000,000 parts
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Production scheduling
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220,000
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Number of units
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110,000 units
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Packaging and shipping
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440,000
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Number of units
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110,000 units
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$1,060,000
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Variable overhead
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Machine setup
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$ 446,000
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Number of setups
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278,750 setups
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Hazardous waste disposal
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48,000
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Pounds of waste
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16,000 pounds
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Quality control
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560,000
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Number of inspections
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160,000 inspections
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General supplies
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66,000
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Number of units
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110,000 units
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$1,120,000
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Manufacturing
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Machine insertion
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$1,200,000
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Number of parts
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3,000,000 parts
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Manual insertion
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4,000,000
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Number of parts
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1,000,000 parts
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Wave soldering
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132,000
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Number of units
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110,000 units
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$5,332,000
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REQUIRED PER UNIT
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Product #347
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Product #658
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Parts
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25
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55
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Machine insertions of parts
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24
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35
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Manual insertions of parts
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1
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20
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Machine setups
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2
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3
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Hazardous waste
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0.02 lb
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0.35 lb
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Inspections
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1
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2
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Alexander wants to calculate a new cost, using appropriate cost drivers, for each product. The new cost drivers would replace the direct labor, machine time, and overhead costs in the current costing system.
a. Identify at least four general advantages associated with activity based costing.
b. On the basis of current costs, calculate the total contribution expected in 2011 for
1. Product #347.
2. Product #658.
c. On the basis of activity based costs, calculate the total contribution expected in 2011 for
1. Product #347.
2. Product #658.
d. Explain how the comparison of the results of the two costing methods could impact the decisions made by Casito’s management group.
