In addition, the following information is projected for the next calendar year, 20x2 — Whitestone Company produces two subassemblies JR-14 and RM-13 used manufacturing trucks

Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20x 1 is as follows:

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Mark Ward, Whitestone’s president, has been reading about a product-costing method called activity- bused costing. Ward is convinced that activity-based costing will cast a new light on future profits. As a result. Brian Walters, Whitestone’s director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13,

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In addition, the following information is projected for the next calendar year, 20x2

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On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455, Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.

Whitestone uses a just-in-time inventory system and ha materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, lust-out (FIFO) inventory method.

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Required:

1. Explain how activity-based costing differs from traditional product-costing methods.

2. Using activity-based costing, calculate the total cost for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar) Then, calculate the pool rate per unit of the appropriate cost driver fir each of the four activities.

3. Prepare a table showing for each product line the estimated 20x2 cost for each of the following cost elements: direct material, direct labor, machining, assembly, material handling, and inspection.(Round to the nearest dollar,)

4. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2, using activity-based costing. The statement should show each product and a total for the company. Be sure to include detailed calculations for die cost of goods manufactured and sold. (Round each amount in the statement to the nearest dollar)

SOLUTION

1. Activity-based costing (ABC) differs from traditional costing in that it focuses on activities that consume resources as the fundamental cost drivers. ABC is a two-stage cost assignment process focused on causality and the determination of cost drivers. It usually uses several different activities to assign costs to products or services. Therefore, it is more detailed and more accurate than traditional costing. It also helps managers distinguish between value added and non-value added activities.

2.	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:	Calculations of total activity cost pools and pool rates:
	Machining	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)	($424,528 1.06) (15,000 hours + 30,000 hours)
		= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour	= $450,000* 45,000 hours = $10 per machine hour
		*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded
	Assembly	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)	($216,981 1.06) (6,000 hours + 5,500 hours)
		= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour	= $230,000* 11,500 hours = $20 per assembly hour
		*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded
	Material handling	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]	($56,604 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]
		= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)	= $60,000* (25,000 parts + 50,000 parts)
		= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part	= $60,000 75,000 parts = $.80 per part
		*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded
	Inspection	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)	($117,925 1.06) (5,000 hours + 7,500 hours)
		= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour	= $125,000* 12,500 hours = $10 per inspection hour
		*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded	*Rounded
3.	3.	3.
			JR-14	JR-14	JR-14	RM-13	RM-13	RM-13	RM-13
			20x1 Cost Data	Estimated 20x2 Product Cost		20x1 Cost Data	Estimated 20x2 Product Cost
Direct material:	Direct material:	Direct material:
No cost increase	No cost increase	No cost increase		$1,000,000			$1,750,000
Direct labor:	Direct labor:	Direct labor:
Direct labor	Direct labor	Direct labor	$185,185			$92,593
1.08 cost increase	1.08 cost increase	1.08 cost increase		200,000	(rounded)		100,000	(rounded)	(rounded)
Machining:	Machining:	Machining:
Machining activity in hours	Machining activity in hours	Machining activity in hours	15,000			30,000
$10 per hour	$10 per hour	$10 per hour		150,000			300,000
Assembly:	Assembly:	Assembly:
Assembly activity in hours	Assembly activity in hours	Assembly activity in hours	6,000			5,500
$20 per hour	$20 per hour	$20 per hour		120,000			110,000
Material handling:	Material handling:	Material handling:
Number of parts	Number of parts	Number of parts	5			10
units produced	units produced	units produced	5,000			5,000
			25,000			50,000
$.80 per unit	$.80 per unit	$.80 per unit		20,000			40,000
Inspection:	Inspection:	Inspection:
Inspection hours	Inspection hours	Inspection hours	5,000			7,500
$10 per hour	$10 per hour	$10 per hour		50,000			75,000
Total cost	Total cost	Total cost		$1,540,000			$2,375,000

4.	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2
	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2	Whitestone Company Budgeted Statement of Gross Margin for 20x2
					JR-14	RM-13	Total	Total
	Sales revenue	Sales revenue	Sales revenue	Sales revenue	$1,810,500	$2,229,500	$4,040,000	$4,040,000
	Cost of goods manufactured and sold:	Cost of goods manufactured and sold:	Cost of goods manufactured and sold:	Cost of goods manufactured and sold:
	Beginning finished-goods inventory	Beginning finished-goods inventory	Beginning finished-goods inventory	Beginning finished-goods inventory	$ 240,000	$ 300,000	$ 540,000	$ 540,000
	Add:	Add:	Direct material	Direct material	1,000,000	1,750,000	2,750,000	2,750,000
			Direct labor	Direct labor	200,000	100,000	300,000	300,000
			Machining	Machining	150,000	300,000	450,000	450,000
			Assembly	Assembly	120,000	110,000	230,000	230,000
			Material handling	Material handling	20,000	40,000	60,000	60,000
			Inspection	Inspection	50,000	75,000	125,000	125,000
	Cost of goods available for sale	Cost of goods available for sale	Cost of goods available for sale	Cost of goods available for sale	$1,780,000	$2,675,000	$4,455,000	$4,455,000
	Less:	Less:	Less:	Ending finished-goods inventory*	215,600	332,500	548,100	548,100
	Cost of goods sold	Cost of goods sold	Cost of goods sold	Cost of goods sold	$1,564,400	$2,342,500	$3,906,900	$3,906,900
	Gross margin	Gross margin	Gross margin	Gross margin	$ 246,100	$ (113,000)	$ 133,100	$ 133,100
*Ending finished-goods inventory = (total product cost units produced) ending inventory in units:
JR-14: ($1,540,000 5,000 units) 700 units = $215,600 RM-13: ($2,375,000 5,000 units) 700 units = $332,500