[The following information applies to the questions displayed below.] Knickknack, Inc. manufactures two products: Odds and...
[The following information applies to the questions displayed below.]
Knickknack, Inc. manufactures two products: Odds and Ends. The firm uses a single, plantwide overhead rate based on direct-labor hours. Production and product-costing data are as follows:
|Direct labor (not including setup time)||30||(2 hr. at $15)||45||(3 hr. at $15)|
|Manufacturing overhead||96||(2 hr. at $48)||144||(3 hr. at $48)|
|Total cost per unit||$||166||$||249|
|Manufacturing overhead budget:|
|Setup and inspection||180,000|
Predetermined overhead rate:
|Budgeted manufacturing overhead||=||$816,000||= $48 per direct-labor hour|
|Budgeted direct-labor hours||(1,000)(2) + (5,000)(3)|
Knickknack, Inc. prices its products at 120 percent of cost, which yields target prices of $199.20 for Odds and $298.80 for Ends. Recently, however, Knickknack has been challenged in the market for Ends by a European competitor, Bricabrac Corporation. A new entrant in this market, Bricabrac has been selling Ends for $220 each. Knickknack’s president is puzzled by Bricabrac’s ability to sell Ends at such a low cost. She has asked you (the controller) to look into the matter. You have decided that Knickknack’s traditional, volume-based product-costing system may be causing cost distortion between the firm’s two products. Ends are a high-volume, relatively simple product. Odds, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.
|Activity Cost Pool||Cost Driver||Budgeted Level of Cost Driver|
|Machine-related costs||Machine hours||9,000||hr.|
|Setup and inspection||Number of production runs||40||runs|
|Engineering||Engineering change orders||100||change orders|
|Plant-related costs||Square footage of space||1,920||sq. ft.|
You have gathered the following additional information:
- Each odd requires 4 machine hours, whereas each end requires 1 machine hour.
- Odds are manufactured in production runs of 50 units each. Ends are manufactured in 250-unit batches.
- Three-quarters of the engineering activity, as measured in terms of change orders, is related to Odds.
- The plant has 1,920 square feet of space, 80 percent of which is used in the production of Odds.
7. Calculate the total amount of product cost distortion for entire product line caused by Knickknack’s traditional, volume-based costing system. (Round your intermediate calculations to 2 decimal places. Negative amount should be indicated by a minus sign.)