ACCT 331 ABC Class Problem 2

Morelli Electric Motor Corporation manufactures electric motors for commercial use.
The company
produces three models, designated as standard, deluxe, and heavy-duty. The company uses a job order
cost-accounting system with manufacturing overhead applied on the basis of direct-labor hours. The
system has been in place with little change for 25 years. Product costs and annual sales data are as
follows:
Standard Model Deluxe Model Heavy-Duty Model

Annual
sales 20,000 1,000 10,000
(units)
Product
costs:
Raw
$ 10 $ 25 $ 42
material
Direct (.5 hr. at (1 hr. at (1 hr. at
10 20 20
labor $20) $20) $20)
Manuf
acturing
85 170 170
overhead
*
Total
product $105 $215 $232
cost
*Calculation of predetermined overhead rate:
Manufacturing-
overhead
budget:
Depreciation,
$ 1,480,000
machinery
Maintenance,
120,000
machinery
Depreciation,
taxes, and
300,000
insurance for
factory
Engineering 350,000
Purchasing,
receiving and 250,000
shipping
Inspection
and repair of 375,000
defects
Material
400,000
handling
Miscellaneou
s manufacturing 295,000
overhead costs
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Total $ 3,570,000
Direct-
labor
budget:
Stand
ard 10,000 hours
model:
Delux
1,000 hours
e model:
Heavy
-duty 10,000 hours
model:
Total 21,000 hours
Budgeted overhead $3,570,000

Predetermined overhead
= = $170 per hour
rate:
Budgeted direct-labor hours 21,000 hours
For the past 10 years, the company’s pricing formula has been to set each product’s target price at
110 percent of its full product cost. Recently, however, the standard-model motor has come under
increasing price pressure from offshore competitors. The result was that the price on the standard model
has been lowered to $110.
The company president recently asked the controller, "Why can’t we compete with these other
companies? They’re selling motors just like our standard model for 106 dollars. That’s only a buck more
than our production cost. Are we really that inefficient? What gives?"
The controller responded by saying, "I think this is due to an outmoded product-costing system. As
you may remember, I raised a red flag about our system when I came on board last year. But the
decision was to keep our current system in place. In my judgment, our product-costing system is
distorting our product costs. Let me run a few numbers to demonstrate what I mean."
Getting the president's go-ahead, the controller compiled the basic data needed to implement an
activity-based costing system. These data are displayed in the following table. The percentages are the
proportion of each cost driver consumed by each product line.
Product Lines
Heavy-
Standard Deluxe Duty
Activity Cost Pool Cost Driver Model Model Model
I: Depreciation, machinery Machine time 40% 13% 47%
Maintenance, machinery
II: Engineering Engineering hours 47% 6% 47%
Inspection and repair of defects
III: Purchasing, receiving, and shipping Number of material orders 47% 8% 45%
Material handling
IV: Depreciation, taxes, and insurance for factory Factory space usage 42% 15% 43%
Miscellaneous manufacturing overhead
Required:
1. Compute the target prices for the three models, based on the traditional, volume-based product
costing system. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Standard Deluxe Heavy-Duty

Model Model Model
Target price $ $ $
2. Compute new per unit product costs for the three products, based on the new data collected by the
controller. (Round your intermediate calculations and final answers to 2 decimal places. Omit
the "$" sign in your response.)

Model Model Model
Total $ $ $
3. Calculate a new target price for the three products, based on the activity-based costing
system. (Round your intermediate calculations and final answers to 2 decimal places. Omit the
"$" sign in your response.)

Model Model Model
New target price $ $ $
rev: 09_21_2012
Explanation:
1.
Model Model Model
Produc
t costs
based
on
tradition
al,
volume
bas
ed
$ 105.00 $ 215.00 $ 232.00
costing
system
×
× 110% × 110% × 110%
110%
Target
$ 115.50 $ 236.50 $ 255.20
price
2.
Product costs based on activity-based costing system:
Heav
y-
Standard Deluxe
Duty
Model Model
Mode
l
Direct
materia $ 10.00 $ 25.00 $ 42.00
l
Direct
10.00 20.00 20.00
labor
Machi
nery
depreci
ation 32.00 208.00 75.20
and
mainte
nancea
Engin
eering,
inspecti
on and
repa
ir of
17.04 43.50 34.08
defects
b
Purch
asing,
receivin
g,
shippin
g, and
mat
erial
15.28 52.00 29.25
handlin
gc
Factor
y
depreci
ation,
taxes,
insuran
ce,
and
miscell
aneous
12.50 89.25 25.59
overhe
ad
costsd
Total $ 96.82 $ 437.75 $ 226.12
a
Pool I:
Depreci
ation,
$1,480,000
machiner
y
Mainten
ance,
120,000
machiner
y
Total $1,600,000
Standard: ($1,600,000 × 40%) ÷ 20,000 = $ 32.00

208.0
Deluxe: ($1,600,000 × 13%) ÷ 1,000 = $
0
Heavy-Duty: ($1,600,000 × 47%) ÷ 10,000 = $ 75.20
b
Pool II:
Engineerin
$ 350,000
g
Inspection
and repair of 375,000
defects
Total $ 725,000
Standard: ($725,000 × 47%) ÷ 20,000 = $17.04

Deluxe: ($725,000 × 6%) ÷ 1,000 = $43.50
Heavy-Duty: ($725,000 × 47%) ÷ 10,000 = $34.08
c
Pool III:
Purchasing
, receiving, $ 250,000
and shipping
Material
400,000
handling
Total $ 650,000
Standard: ($650,000 × 47%) ÷ 20,000 = $15.28

Deluxe: ($650,000 × 8%) ÷ 1,000 = $52.00
Heavy-Duty: ($650,000 × 45%) ÷ 10,000 = $29.25
d
Pool IV:
Depreciation,
taxes, and
$ 300,000
insurance for
factory
Miscellaneou
s
295,000
manufacturing
overhead
Total $ 595,000
Standard: ($595,000 × 42%) ÷ 20,000 = $12.50

Deluxe: ($595,000 × 15%) ÷ 1,000 = $89.25
Heavy-Duty: ($595,000 × 43%) ÷ 10,000 = $25.59
3.
Heavy-
Standard Deluxe
Duty
Model Model
Model
Produc
t costs
based
on
activity-
based
cos
ting $ 96.82 $ 437.75 $ 226.12
system
×
× 110% × 110% × 110%
110%
New
target $ 106.50 $ 481.53 $ 248.73
price
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Morelli Electric Motor Corporation manufactures electric motors for commercial use.

Standard Model Deluxe Model Heavy-Duty Model

*Calculation of predetermined overhead rate:

Total 21,000 hours

Budgeted overhead $3,570,000

Standard Deluxe Heavy-Duty

Standard Deluxe Heavy-Duty

Standard Deluxe Heavy-Duty

Total $ 96.82 $ 437.75 $ 226.12

Standard: ($1,600,000 × 40%) ÷ 20,000 = $ 32.00

Standard: ($725,000 × 47%) ÷ 20,000 = $17.04

Standard: ($650,000 × 47%) ÷ 20,000 = $15.28

Standard: ($595,000 × 42%) ÷ 20,000 = $12.50

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