Basketballs
Volleyballs
Total
Direct materials
$168,100
$303,280
$
471,380
Direct manufacturing labor
111,800
100,820
212,620
Setup
($210 × 450; 300)
94,500
63,000
157,500
Equipment and maintenance
($4.80 × 13,500; 10,500)
64,800
50,400
115,200
Lease rent, etc.
($15 × 3,200; 8,000)
48,000
120,000
168,000
Budgeted total costs
$487,200
$637,500
$1,124,700
Divided by number of units
÷ 58,000
÷ 85,000
Budgeted cost per unit
$
8.40
$
7.50
4.
Currently, Zarson’s only utilizes 80% of its available capacity. The excess capacity is
currently costing Zarson’s $42,000 annually, so Zarson’s would need to consider using the
excess capacity to expand production of either of the existing models, or add a new product line
in the future. Zarson’s should only do so if there is available skilled labor and machine capacity,
as well as demand for the product to justify higher costs and the capital investment needed.
Zarson’s may also consider renting out the available space to a compatible outside user, with the
option to take the space back if needed.
On the other hand having excess capacity might also be beneficial to Zarson’s. It allows the
company to accept special orders if they are received and to reduce the confusion and complexity
that occurs when a plant is operating at full capacity.
5-41 Unused capacity, activity-based costing, activity-based management.
Archer Pro
manufactures two models of sport bows, Basic and Deluxe, using a combination of machining
and hand finishing. Machine setup costs are driven by the number of setups. Indirect
manufacturing labor costs increase with direct manufacturing labor costs. Equipment and
maintenance costs increase with the number of machine-hours, and facility rent is paid per
square foot. Capacity of the facility is 10,000 square feet, and Archer Pro is using only 75% of
this capacity. Archer Pro records the cost of unused capacity as a separate line item and not as
a product cost. For the current year, Archer Pro has budgeted the following:
Other budget information follows:
5-58
Required
1.
Calculate the cost per unit of each cost-allocation base.
2.
What is the budgeted cost of unused capacity?
3.
Calculate the budgeted total cost and the cost per unit for each model.
4.
Why might excess capacity be beneficial for Archer Pro? What are some of the issues Archer
Pro should consider before increasing production to use the space?
SOLUTION
(30 min.)
Unused capacity, activity-based costing, activity-based management.
1.
Cost
Allocation Base
Allocation Rate
Indirect manufacturing
labor costs
$105,000
$350,000 direct
labor cost
30% of direct
labor cost
Machine setup costs
$
60,000
800 batches
$75/batch
Equipment and
maintenance costs
$264,000
33,000 MH
$8/MH
Facility rent costs
$250,000
10,000 sq. ft.
$25/sq. ft.
2.
Budgeted cost of unused capacity = $25 per sq. ft. (10,000 – 4,000 – 3,500) sq. ft.
= $25
×
2,500 sq. ft. =
$62,500
3.
Basic
Deluxe
Direct materials
$450,000
$320,000
Direct manufacturing labor
155,000
195,000
Indirect manuf. labor ($155,000 and $195,000
×
30%)
46,500
58,500
Machine setup (500 and 300 batches
×
$75 per batch)
37,500
22,500
Equipment and maintenance costs (15,000 and
18,000 MH
×
$8 per MH)
120,000
144,000
Facility rent (4,000 and 3,500 sq. ft.
×
$25 per sq. ft.)
100,000
87,500
Total cost
$909,000
$827,500
Divided by number of units
÷
10,000
÷
5,000
Cost per unit
$
90.90
$
165.50
4.
Currently, Archer Pro only utilizes 75% of its available capacity. The excess capacity is
