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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