Homework 1 Hindenburg Inc. is an automobile manufacturer in the city of New Orleans, Louisiana that specializes in farm-related vehicles, such as tractors, etc. They have two types of tractors - Standard and Custom. Despite high demand, company president, Mr. Adani, is concerned about losses the company is incurring for Custom tractors. Since the competition in the segment is high, he needs to keep the prices in line with his competitors. While he believes his costing system is correct, he is concerned that some costs are not classified properly across two types of vehicles. He is currently using traditional costing methodology based on direct labor hours to estimate manufacturing overheads for each tractor.

Mr. Adani has hired a recently designated CPA to help him solve the dilemma. The CPA has decided to implement an activity-based costing system designed to provide relevant information to assist with decision making. The ABC system she designed has three activity cost pools: Order processing costs, machine processing costs, and product inspection costs. These activities are driven by number of orders processed (Order processing activity), machine hours worked (Machine processing costs), and inspection hours (Product inspection costs).

The following actual costs will be assigned using the activity-based costing system:

Order processing costs $210,000

Machine processing costs $875,000

Product inspection costs $157,500

Total manufacturing overheads $1,242,500

To get started the CPA has asked that she review the sales figures and other relevant information about two models of tractors (standard and custom). The information related to the tractors is as follows:

Standard Tractor Custom Tractor

Annual Sales 2500 3125

Sales Price ($ per unit) $980 $1,270

Direct Labor Hours (per unit) 3 4

Direct Labor Rate per Hour $150 $150

Direct Materials ($ per unit) $300 $450

Orders processed 350 250

Machine hours worked 23,000 27,000

Inspection hours 4,000 11,000

Required:

1. Assuming use of direct labor hours as cost driver, compute the unit manufacturing cost of the standard and custom tractor.

2. Assuming use of activity-based costing, compute the unit manufacturing cost of the standard and custom tractors.

3. Calculate the amount of cost-distortion based on traditional costing and activity-based costing and explain the reasons for incurred losses for custom tractor earlier.

Answer rating: 100% (QA)

1 Unit Manufacturing Cost using Direct Labor Hours For Standard Tractor Direct Labor Cost 3 hours 150hour 450 Direct Materials Cost 300 Manufacturing ... View the full answer