Accounting question

Question 3

Elkin Company manufactures wheel rims. The controller budgeted ABC allocation rates for 2010. Elkin 

produces two wheel rim models: standard and deluxe. Budgeted data for 2010 are as follows:

Cost

Activity

Allocation Base

Allocation Rate

Materials handling

Number of parts

$5.00

per part

Machine setup

Number of setups

600.00

per setup

Insertion of parts

Number of parts

22.00

per part

Finishing

Finishing direct labor hours

60.00

per hour

Budgeted Data - 2010

Standard

Deluxe

Parts per rim

3.0

7.0

Setups per 1,000 rims

17.0

17.0

Finishing direct labor hours per rim

2.0

2.5

Total direct labor hours per rim

3.0

7.0

In 2011, Elkin's managers used the same indirect manufacturing costs per wheel rim that they computed in 2010. In addition to the unit indirect manufacturing costs, the following data are budgeted for the company's standard and deluxe models for 2011.

Standard

Deluxe

Sales price

800.00

1,040.00

Direct materials

31.00

47.00

Direct labor

45.00

54.00

Quantity of

Cost

Allocated activity

allocation

allocation

cost per rim

ABC cost per unit:

base used

×

rate

=

(Deluxe)

Materials handling

7.0

×

$5.00

=

$35.00

Machine setups

0.017

×

$600.00

=

10.20

Insertion of parts

7.0

×

$22.00

=

154.00

Finishing direct labor hours

2.5

×

$60.00

=

150.00

Total

$349.20

Controller Milton Bender is surprised by the increase in cost of the deluxe model under ABC. He had a market research study conducted.

Market research shows that for the deluxe rim to provide a reasonable profit, Elkin 

will have to meet a target manufacturing cost of $450 per rim. A value engineering study by 

Elkin's employees suggests that modifications to the finishing process could cut finishing cost from 

$60 to $50 per hour and reduce the finishing direct labor hours per deluxe rim from 2.5 hours to 

2.0 hours. Direct materials would remain unchanged at $47 per rim, as would direct labor at 

$54 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same.

Requirement 1. First calculate the revised finishing activity cost per rim.

Finishing activity cost per rim

per rim