Highland Manufacturing produces two products in its Saratoga plant, balzene and galvene. Since it opened its doors in 1965, Highland has been
using a single manufacturing overhead pool to accumulate overhead costs. Overhead has been allocated to products based on direct labor hours.
Until recently, Highland was the sole producer of galvene in the country and was therefore able to dictate the selling price. However, last year Marcella Products began marketing a comparable product at $37 per unit-a price that is below Highland's product cost.
Highland's market share of galvene has declined rapidly as a result. The company's managers must now decide whether to meet the competitive price or discontinue the product. Highland's cost accountant has suggested that the company do an activity-based cost analysis before managers make the decision.
The two main indirect costs of manufacturing balzene and galvene are power usage and setup costs. Most of the power usage occurs in the fabricating department; most of the setup costs are incurred in the assembly department. Setup costs are incurred predominantly in the production of balzene. The fabricating department has identified machine hours as the appropriate cost driver; the assembly department has identified setups as the appropriate cost driver. Direct labor rates are the same in both departments.
The combined budget for manufacturing is as follows.

The cost accountant has prepared the following estimates of overhead usage by the two departments:

a. Calculate the unit costs of balzene and galvene using the current overhead allocation basis of direct labor hours.
b. Calculate the amount of overhead cost assigned to the Fabricating and Assembly activity cost pools using the cost accountant's estimates. Determine the overhead rate for each cost pool.
c. Calculate the unit costs of balzene and galvene using activity-based costing. Round your answer to two decimal places.
d. Did the switch to activity-based costing change the actual cost to produce galvene? Why or why not?
e. What action should Highland's managers take regarding the production of galvene?Why?

  • CreatedFebruary 21, 2014
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