Ballantine Company Manufactures Two Products Because the Industrial Product Is Twice as Profitable as the System

question 102

Essay

Ballantine Company manufactures two products.Currently,the company uses a traditional costing system assigning overhead on the basis of direct labor hours.The Industrial product is more complex to produce requiring two hours of direct labor time per unit compared to one hour of direct labor time for the Consumer product.Given the company's total overhead costs of $720,000 and production of 1,000 Industrials and 8,000 Consumers,this results in an overhead allocation rate of $72 per direct labor hour.The following unit data are provided: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text {Selling price}\\\hline \text {Direct material}\\\hline \text {Direct labor}\\\hline \text {Overhead}\\\hline \text {Gross profit}\\\hline\end{array}\begin{array}{l|}\hline \text {Industrial}\\\hline\$ \quad 1,440.00 \\ \hline(500.00) \\ \hline(400.00) \\ \hline(144.00) \\ \hline\$ \quad 396.00\\\hline\end{array}\begin{array}{l|}\hline \text {Consumer}\\\hline\$ 20.00 \\\hline(250.00) \\\hline(200.00) \\\hline(72.00) \\\hline\$ \quad 198.00\\\hline\end{array}\end{array}$

Because the Industrial product is twice as profitable as the Consumer model,the sales manager wants to reduce or eliminate production of the Consumer product and devote as much capacity as possible to the Industrial product.
You are worried that the current cost accounting system may be providing inaccurate results and would like to implement an ABC system.Assume that the company's overhead costs were traced to four major activities.The amount of overhead costs traceable to each activity for the current year is provided below: $\begin{array}{c}\hline\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Cost Driver Data }\\\hline \begin{array}{|l|}\hline\text { Activity } \\\hline \text { Matll handling } \\\hline \text { Setup } \\\hline \text { Assembly } \\\hline \text { Mantenance } \\\hline \text { Total } \\\hline \end{array}\begin{array}{l|}\hline\text {Cost Driver}\\\hline\text {No, of Prechase Orders}\\\hline\text {No. of setrins}\\\hline\text {No, of machine Irs.}\\\hline\text {No. of maintenamee requests}\\\hline \\\hline\end{array}\begin{array}{l}\hline\text { Overhead Cost }\\\hline\$ 60,000 \\\hline 288,000 \\\hline 225,000 \\\hline 147,000 \\\hline \$ 720,000 \\\hline \end{array}\begin{array}{|l|}\hline\text { Indus trial }\\\hline100 \\\hline5000 \\\hline 7,000 \\\hline 440 \\\hline \\\hline \end{array}\begin{array}{l|}\hline\text { Consumer }\\\hline500 \\\hline250 \\\hline 3,000 \\\hline 295 \\\hline \\\hline \end{array}\begin{array}{l|}\hline\text {Total }\\\hline600 \\\hline750 \\\hline 10,000 \\\hline 735 \\\hline\\\hline \end{array}\end{array}$
Required:
1)In the following table,compute the four activity rates that will be used to assign overhead to the products under activity-based costing: $\begin{array}{|l|l|}\hline {\text { Activity }} & {\text { Application Rate }} \\\hline \text { Mat'l handling } & \\\hline \text { Setup } & \\\hline \text { Assembly } & \\\hline \text { Maintenance } & \\\hline\end{array}$ 2)In the following table,compute the amount of overhead cost which should be assigned to Industrials and Consumers under activity-based costing.Also compute the overhead cost per unit for each product. $\begin{array}{|l|l|l|}\hline {\text { Activity }} & \underline{\mathbf{1 , 0 0 0} \text { Industrials }} & \underline{\mathbf{8 , 0 0 0} \text { Consumers }} \\\hline \text { Mat'l handling } & & \\\hline \text { Setup } & & \\\hline \text { Assembly } & & \\\hline \text { Maintenance } & & \\\hline \text { Total Overhead Cost } & & \\\hline & & \\\hline \text { Overhead cost per unit } & & \\\hline\end{array}$ 3)Compute the total cost to manufacture one unit of each product if activity-based costing is used. $\begin{array}{|l|l|l|}\hline & {\text { Industrials }} & {\text { Consumers }} \\\hline \text { Direct materials } & \$ 500.00 & \$ 250.00 \\\hline \text { Direct labor } & 400.00 & 200.00 \\\hline \text { Overhead } & & \\\hline \text { Total cost per unit } & \\\hline\end{array}$ 4)Respond to the sales manager's recommendation that capacity be diverted from Consumers to Industrials.

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Definitions:

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A group of fat-soluble secosteroids responsible for increasing intestinal absorption of calcium, magnesium, and phosphate.

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A diverse group of roughly 120 species of mammals that are primarily ocean-dwelling or depend significantly on aquatic ecosystems for their survival.

Calcium Homeostasis

The regulation of calcium levels in the blood within a narrow range, crucial for various physiological processes including bone formation, blood coagulation, and muscle contraction.

Vitamin D

Vitamin D is a fat-soluble vitamin essential for healthy bones and immune function, obtained from sunlight exposure and certain foods.