Kettle Company Produces Two Products (F56 and F57), Applying Manufacturing

question 49

Essay

Kettle Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kettle's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kettle's selling prices are based heavily on cost.
Required:
A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
B. Compute:
1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.
C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.
1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

Understand the concept of multiplicative and additive inverses.

Identify and apply real number properties (e.g., distributive, commutative, associative, additive inverse, additive identity properties).

Perform basic arithmetic operations, including the use of the distributive property to simplify expressions.

Calculate the total amount saved over time, including simple interest calculations.

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Definitions:

Short-Run Aggregate-Supply Curve

A curve that shows the relationship between the total output of goods and services and the price level for output in the short run.

Wages Are Sticky

The theory that salaries do not adjust quickly to changes in market conditions, leading to unemployment or surpluses.

Short-Run Aggregate Supply Curve

A graphical representation showing the relationship between the total production of goods and services and the price level for output in the short run.

Actual Price Level

The current general price of goods and services in the economy.