Using activity-based management and target costing Refer to Exercises E19-19 and E19-20. Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable profit, Elton will have to meet a target manufacturing cost of $656.00 per rim. A value engineering study by Elton’s employees suggests that modifications to the finishing process could cut finishing cost from $50.00 to $40.00 per hour and reduce the finishing direct labor hours per deluxe rim from 6.5 hours to 6.0 hours. Direct materials would remain unchanged at $50.00 per rim, as would direct labor at $56.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same. Would implementing the value engineering recommendation enable Elton to achieve its target cost for the deluxe rim?

Using activity-based costing to make decisions Refer to Exercise E19-19. For 2015, Elton’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2014. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2015:

Because of limited machine-hour capacity, Elton can produce either 2,000 standard rims or 2,000 deluxe rims.

Requirements

1. If Elton’s managers rely on the ABC unit cost data computed in Exercise E19- 19, which model will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses for this calculation.)

2. If the managers rely on the single plant wide allocation rate cost data, which model will they produce?

3. Which course of action will yield more income for Elton?

Exercise E19-19

Computing product costs in traditional and activity-based costing systems Elton Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2014:

Elton produces two wheel rim models: standard and deluxe. Expected data for 2014 are as follows:

The company expects to produce 500 units of each model during the year.

Requirements

1. Compute the total estimated indirect manufacturing cost for 2014.

2. Compute the estimated ABC indirect manufacturing cost per unit of each model. Carry each cost to the nearest cent.

3. Prior to 2014, Elton used a direct labor hour single plant wide allocation rate system. Compute the allocation rate based on direct labor hours for 2014. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.