Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her last three bids were rejected in favor o

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Jeri Cooper, the sales manager of Brunners Corporation, is
getting worried. Her last three bids were rejected in favor of a
lower bid from a new competitor to the market. Now, she is putting
together a bid for a potential new customer, and she wants to make
sure the price is competitive, but still profitable. As the
managerial accountant at Brunners, your job is to help Jeri prepare
bids by providing the most accurate cost estimates.
Brunners is a plastic injection custom molding company, which
advertises its highly automated process as keeping costs low.
Currently, Brunners uses a traditional (plantwide) costing system,
with overhead costs allocated based on total direct labor hours.
Brunners expects to use a total of 95,000 direct labor hours this
year. Suspecting that their traditional costing system is partially
to blame for their recent problems, Brunners has begun the process
of implementing ABC. However, before this new company entered the
market, Brunners had little need to review their processes. Jeri
has very little understanding of cost accounting, and has asked if
her recent unsuccessful bids were due to an inaccurate costing
system, or if there are process inefficiencies that have driven up
costs.
In the ABC implementation process, Brunners Corporation has
identified four activities. The ‘production’ activity is a highly
automated process, where a few workers oversee several machines as
they produce parts. This is a large cost pool, as it includes the
depreciation on the building and all the plastic injection molding
machines (i.e., millions of dollars of property, plant, and
equipment), and the wages of these production employees is directly
traced to the job. In the ‘materials’ activity, workers with
specialized machine training prepare each machine for a new process
or color (setups) by cleaning and changing the molds in the
machines, and then refilling the machines with plastic pellets
(refills) as needed. Wages of these workers is considered indirect
labor. In the ‘correction’ process, workers trim extra plastic from
the parts. This extra plastic normally snaps off cleanly as the
parts come out of the mold, but often needs to be trimmed as the
molds get worn or if the mold is not correctly installed in the
machine. Wages of these workers is also directly traced to the job.
The trimming process is also where parts that are defective are
thrown out, so this activity also includes the cost of wasted
materials. Finally, in the ‘inspection’ activity, inspectors
randomly select and inspect parts to ensure compliance with the
customer’s specifications. Inspectors’ wages are considered
indirect labor.
Having determined four activities used at Brunners, the ABC
implementation team has separated the plant’s total overhead costs
into the activity cost pools (see Table 1). The next step in the
ABC implementation process it to identify cost drivers for each
activity. So far, they have identified cost drivers for each of the
activities (see Table 1). This is still a work in progress, though,
and they are still making adjustments.
The proposed job is somewhat different, requiring pieces in a
variety of colors (see Table 2 for details on the proposed job).
Historically, customer jobs have required only one or two setups.
While Brunners has not needed to support these types of requests in
the past, several recent bids (all rejected) have had similar
needs. The plant manager believes that these types of jobs will
increase in the future. Proving that they can support these
requests may result in new business in the future.
You’ve realized that you could provide value to Brunners in a
several different ways. First, providing cost estimates from both
the traditional process and the proposed ABC method could shed some
light on the accuracy of the cost estimation process. Second, you
can use activity based management to identify improvements that
could be made to the production process (if any). Finally, with
your knowledge of this job (and the market looking forward), you
could provide some valuable input to the ABC implementation
team.
Table 1: ABC activities, cost drivers, and cost
pools
Activity
Activity cost driver
Total activity cost pool
Est. cost driver usage
Production
Machine hours
$1,580,000
600,000
Materials
Lbs of materials
$620,000
230,000
Correction
DLH (trimming)
$755,000
35,000
Inspection
# of inspections
$290,000
2,000
Table 2: Job proposal (resources)
Direct materials
$7,400
Direct labor (total cost)
$11,600
Direct labor hours (in production)
250
Direct labor hours (in correction)
575
Lbs of material
3,500
Number of setups
6
Number of colors used
4
Number of inspections
15
Number of machine-hours
1000
2. Provide a total cost estimate using the activity
based costing system proposed by the ABC implementation team.
Solution :
NOTE:
Calculation of “Activity Rate”
Cost Pool
Cost( $ )
Cost Driver
Cost Driver Rate
Moulding
$ 580000
Machine Hours
(300000 hours)
$ 1.93 per hour
Material
Management
$ 220000
Lbs of material
(120000 lbs)
$ 1.83 per lbs
Trimming
$ 255000
DLH(trimming)
$ 17 per DLH of
Trimming
Inspection
$ 100000
# of inspections
$ 50 per inspection
$1155000
Statement showing the overhead
allocation
Particulars
Amount
Moulding
(1000 machine hours* $ 1.93 per
hour)
$ 1930
Material Management
(3500 Lbs* $ 1.83 per lbs)
$ 6405
Trimming
(500 DLH*$ 17 per DLH of
Trimming)
$ 8500
Inspection
(15 inspections*$ 50 per
inspection)
$ 750
Total Overheads
$ 17585
Cost Estimate under ABC Costing
Particulars
Amount
Direct Materials
$ 7400
Direct Labor
$ 11600
Overheads
$ 17585
Total Cost estimate of the Job
$ 36585
THIS IS SOLVED BUT I NEED SOME HELP ON HOW THE NUMBERS ARE
RETRIEVED, WHAT FORMULA WAS DONE TO RECIEVE THE COST DRIVER NUMBERS
AND COST NUMBERS. NO NEED TO DO EACH. I JUST WANT TO UNDERSTAND THE
FORMULA USED