Calculating Cost

Assignment 2: Calculating Cost

Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period is $800,000 and 25,000 hours, respectively. Information about the company's products follows.

	Standard:	Enhanced:
Estimated production volume	3,000 units	4,000 units
Direct-material cost	$25 per unit	$40 per unit
Direct labor per unit	3 hours at $12 per hour	4 hours at $12 per hour

Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively.

Data relevant to these activities follow:

	Orders Processed	Machine Hours Worked	Inspection Hours
Standard	300	18,000	2,000
Enhanced	200	22,000	8,000
Total	500	40,000	10,000

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.

Using a Microsoft Excel format for calculations, complete the following:

• Assuming use of direct-labor hours to apply overhead to production, calculate the unit manufacturing costs of the standard and enhanced products if the expected manufacturing volume is attained.
• Assuming the use of activity-based costing, calculate the unit manufacturing cost of the standard and enhanced products if the expected manufacturing volume is attained.
• Ontario’s selling price is based heavily on cost:
  • Calculate which product is over cost and which is under cost by using direct-labor hours as an application base.
  • Explain if it is possible that this over costing and under costing is responsible for the profit issues the company is facing.
• Illustrate how the solution will change if the following data changes:
  • The overhead associated with order processing is $300,000 and the overhead associated with product inspection is $270,000.