Choosing an Activity-Based Costing System
MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated overhead to products using machine-hours. Last year, the company produced 10,000 units of M3100, 17,500 units of M4100, and 10,000 units of M6100 and had the following revenues and costs:
|
MTI |
||||
|
M3100 |
M4100 |
M6100 |
Total |
|
|
Sales |
$9,000,000 |
$15,000,000 |
$13,500,000 |
$37,500,000 |
|
Direct costs |
||||
|
Direct materials |
3,000,000 |
4,500,000 |
3,300,000 |
10,800,000 |
|
Direct labor |
600,000 |
900,000 |
1,800,000 |
3,300,000 |
|
Variable overhead |
||||
|
Setting up machines |
2,400,000 |
|||
|
Processing sales orders |
1,800,000 |
|||
|
Warehousing |
2,400,000 |
|||
|
Operating machines |
1,200,000 |
|||
|
Shipping |
900,000 |
|||
|
Contribution margin |
$14,700,000 |
|||
|
Plant administration |
6,000,000 |
|||
|
Gross profit |
$ 8,700,000 |
MTI’s controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following:
|
Activity |
Cost Driver |
M3100 |
M4100 |
M6100 |
|
Setting up machines |
Production runs |
10 |
20 |
20 |
|
Processing sales orders |
Sales orders received |
180 |
400 |
220 |
|
Warehousing |
Units held in inventory |
100 |
200 |
100 |
|
Operating machines |
Machine-hours |
6,000 |
9,000 |
10,000 |
|
Shipping |
Units shipped |
10,000 |
17,500 |
10,000 |
The employee team recommends that plant administration costs not be allocated to products.
Required
a. Using machine-hours to allocate overhead, complete the income statement for MTI. Do not allocate plant administrative costs to products.
b. Complete the income statement using the activity-based costing method suggested by the employee team.
c. Write a brief report indicating how activity-based costing might result in better decisions by MTI.
d. After hearing the recommendations, the president expresses concern about failing to allocate plant administrative costs. If plant administrative costs were to be allocated to products, how would you allocate them?
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