Cost accounting principles and methods

Cost Accounting

A. The allocation system might not be accurate, because it allocates based on the number of units produced. However, it does not take into account the time it takes to produce an individual unit. The overhead costs would be more accurate if they reflected not just the number of units, but the time taken to produce each unit. If the Ogunquit takes up more than 12% of the total production time for the company, then the current system undervalues it from an overhead allocation perspective. Last year, the allocation was

Units

% total Units

Overhead Allocation

Goose Rocks

50

29.41%

1350000

Kennebunkport

100

58.82%

2700000

Ogunquit

20

11.76%

540000

B. By direct labor hours, the overhead allocation would look much different:

Direct Labor

%DL

Overhead Allocation

Goose Rocks

1000

14.81%

680,000

Kennebunkport

1000

14.81%

680,000

Ogunquit

4750

70.37%

3,230,000

total

6750

C. The use of more than one cost pool would improve the overhead allocation because it would better reflect the way that resources are used in the production of each boat. Using one cost pool places the entire emphasis on just that one cost, whether it is direct labor or whether it is number of boats produced. Using multiple cost pools can help better reflect the totality of resources that the company uses for each boat.

D.

Manufacturing Overhead

Amount

GR %

GR value

KBP %

KBP Value

OQ %

OQ Value

Depreciation

2200000

25.0%

550000

37.5%

825000

37.5%

825000

Maintenance

700000

20.4%

142857

40.8%

285714

38.8%

271429

Purchasing

180000

16.7%

30000

16.7%

30000

66.7%

120000

Inspection

350000

12.5%

43750

25.0%

87500

62.5%

218750

Indirect Materials

290000

29.4%

85294

58.8%

170588

11.8%

34118

Supervision

800000

33.3%

266223

66.6%

532446

0.2%

1331

Supplies

70000

29.4%

20588

58.8%

41176

11.8%

8235

Total

1138712

1972425

1478863

E.

Ogunquit

Direct Materials

250000

Direct Labor

440000

Overhead

73943

Total Unit Cost

$763,943.13

F. The costs are different because the traditional method was a straight-line assumption that wasn’t rooted in data. The cost with activity-based costing is based on actual figures that measure the cost of the different resource inputs used to create the boat. In this case, the figure is higher for this model.

G. At the current selling price of $800,000, the company is still covering the cost of production, but is taking a very slim margin for this type of product.

H. The margin on the Kennebunkport is 20% (40/200). So the selling price on the Ogunquit should be:

Total Unit Cost

$763,943.13

Price

$954,928.91

Margin

0.2

$954,929

I. If the quantity of the yachts sold falls to 10 per year, the activity-based costing is adjusted. This changes the overhead allocation and implies that the company should increase the price:

Ogunquit

Direct Materials

250000

Direct Labor

440000

Overhead

94830

Total Unit Cost

$784,830.38

Price

$981,037.97

Margin

0.2

J. If the price cannot exceed $800K, then the company is not making enough money on the Ogonquit. It should cancel the Ogonquit, and use those resources to produce more of the other models, as they have higher margins.

K. The breakeven volume for the Ogonquit at $800,000 is as follows. You wouldn’t use activity based costing in the sense that the overheads change depending on the level of activity. But you could work with the current traditional allocation at which point 5 units is the breakeven point: