Question 4

Outdoor Adventures is a contract provider that produces engine parts for small vehicles. Outdoor Adventures produces two parts, Part A and Part B. The competition is fierce among the contract providers of these products. Currently in the marketplace, Part A is experiencing extraordinary competition. On the other hand, Outdoor Adventures seems to have a corner on the market for product B. Because of this, Outdoor Adventures is considering dropping Part A to focus solely on Part B.

Jackie Chen, the controller, is very concerned there might be some problem with the current cost system. Jackie Chen has expressed his concern to the CFO, Lois Lane. Lois has instructed Jackie to conduct a thorough cost study. Jackie collects the following information regarding the products: Prices, materials and labor costs per unit, and typical volumes of activity measures.

1. Calculate the per unit costs of products A and B after allocating costs using direct labor hours as the only allocation basis. That is, compute a single rate for the entire plant. Round rates to two decimal points. 

2. Calculate the per unit costs of A and B after allocating the costs of machines and setup using machine hours as the basis and all remaining overhead using direct labor hours as the only allocation basis. That is, compute two burden rates, as would be done with a departmental accounting system. Round rates to two decimal points.

Rate per machine hour = $410.000 / 37,500 = 10.93 / MH 

3. Calculate the manufacturing overhead costs for each part using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products. Round rates to two decimal points. 

4. Comment on why many firms choose not to implement an activity-based costing system.

5. Noting the ABC costing by itself does not change profit, address the steps that must be taken for this initiative to have a profit impact.