Caroline Lodge

Cost Acct CP #2 GIVEN INFORMATION Overhead Costs Machine Costs $ 350,000.00 Energy $ 700,000.00 Inspection $ 275,000.00 Material Movements $ 120,000.00 Support Services $ 330,000.00 R&D/Parts Maintenance $ 280,000.00 Plant Maintenance $ 400,000.00 Buildings and Grounds $ 210,000.00 Heating and Lighting $ 130,000.00 TOTAL $ 2,795,000.00 Grade A B

Events Cost Driver Machine Hours Machine Hours # of inspections # of orders # of setups # of parts % value added % value added % value added Grade A 1000 1000 25 30 85 18 30% 30% 30% Grade B 650 650 30 45 125 22 70% 70% 70%

2013 PRODUCTION M&L Costs/Unit Units Prices 15,000 $ 400.00 $ 250.00 23,500 $ 250.00 $ 180.00 Overhead Rates by Activity Cost Number of Events Rate per Event $ $ $ $ $ $ $ $ $ 350,000.00 700,000.00 275,000.00 120,000.00 330,000.00 280,000.00 400,000.00 210,000.00 130,000.00 1650 1650 55 75 210 40 $ $ $ $ $ $ 212.12 424.24 5,000.00 1,600.00 1,571.43 7,000.00

Activity Unit Level: Machine Costs Energy Batch Level: Inspection Material Movements Support Services Product Level: R&D/Parts Maintenance Facility Level Plant Maintenance Buildings and Grounds Heating and Lighting

ANALYSIS Both grades of products are making profits; however, Grade A is making a significantly higher profit margin than Grade B. To solve this issue, the first method would be to raise Grade B's prices. A $40 increase in price would make Grade A and Grade B have the same profit margin percentage. If management doesnt like this solution, they need to try to cut Grade B's prices. One area of concern seems to be that B has a significantly higher percentage of Facility Level costs, so that would be an area to evaluate. Becuase both products are making a profit, I do not recommend removing Grade B from production.

Both grades of products are making profits; however, Grade A is making a significantly higher profit margin than Grade B. To solve this issue, the first method would be to raise Grade B's prices. A $40 increase in price would make Grade A and Grade B have the same profit margin percentage. If management doesnt like this solution, they need to try to cut Grade B's prices. One area of concern seems to be that B has a significantly higher percentage of Facility Level costs, so that would be an area to evaluate. Becuase both products are making a profit, I do not recommend removing Grade B from production.

ABC Costing Grade A Events Amount Overhead costs Unit Level: Machine Costs Energy Costs Batch Level: Inspection Material Movements Support Services Product Level: R&D/Parts Main. Facility Level: Plant Maintenance Buldings & Grounds Heating and Lighting Total Overhead Costs Number of Units Produced Overhead Cost per Unit Direct M&L Costs per Unit Total Manucfacturing Cost/Unit

Grade B Events Amount

1000 1000

$ $

212,121.21 424,242.42

650 650

$ $

137,878.79 275,757.58

25 30 85 18

$ $ $ $

125,000.00 48,000.00 133,571.43 126,000.00

30 45 125 22

$ $ $ $

150,000.00 72,000.00 196,428.57 154,000.00

30% 30% 30%

$ $ $

120,000.00 63,000.00 39,000.00

70% 70% 70%

$ $ $

280,000.00 147,000.00 91,000.00

$ 1,290,935.06 15,000 86.06 250.00 336.06

$ 1,504,064.94 23,500 64.00 180.00 244.00

$ $ $

$ $ $

Overhead Costs per unit Direct M&L Cost per unit Total Manufacturing Cost/Unit

Traditional Method Product A $ 112.93 $ 250.00 $ 362.93 overcosted

Product B $ 46.85 $ 180.00 $ 226.85 undercosted