Petersen Pneumatic Company produces three products, nicknamed as Tiger, Panther, and Jaguar. Its manufacturing plant in...

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Petersen Pneumatic Company produces three products, nicknamed as Tiger, Panther, and Jaguar. Its manufacturing plant in Amazon City has three production departments and three service departments. Machining (MC) Plating (PL) Assembly (AS) Purchasing and inventory (PI) Setup and scheduling (SS) Quality control (QC) Support costs are first traced to the six departments. The old cost accounting system allocated the service department costs to the production departments using the following cost drivers: DEPARTMENT DEPARTMENT Purchasing and inventory (PI) Setup and scheduling (SS) Quality control (QC) DEPARTMENT Machining (MC) Plating (PL) Assembly (AS) Tiger Panther Jaguar The old cost accounting system applied support costs to the three products on the basis of direct labor hours. A different cost driver rate was determined for each department. The direct labor wage rate at the plant is $ 10 per hour. PRODUCT Price $1.25 $1.20 $1.30 Tiger 7,000 3,500 2,500 Product Sales SUPPORT COSTS $ 40,000 $ 50,000 $15,000 $ 50,000 $ 120,000 $ 70,000 Direct Labor Hours (DLH) Panther 2,800 1,700 1,000 Sales Units 500,000 200,000 200,000 COST DRIVER Material costs (MAT) Direct labor hours (DLH) Machine hours (MCH) Orders 25 10 40 Jaguar 2,200 1,800 1,000 Batch-related Drivers Setups 110 43 166 Machine hours (MCH) 5,200 1,900 2,900 Material costs per unit MC PL $0.30 $0,25 $0.28 $0.10 $0.10 $0.10 The profitability of the Amazon City's plant has been declining significantly for the past three years despite the successful launch of the new product - Jaguar - which has now captured more than a 60% share of its segment of the industry. In an assiduous endeavor to understand the reasons for its deteriorating profitability, the company has appointed a special task force. List the reasons that the old cost accounting system at Petersen Pneumatic Company may be distorting its product costs. Petersen Pneumatic Company produces three products, nicknamed as Tiger, Panther, and Jaguar. Its manufacturing plant in Amazon City has three production departments and three service departments. Machining (MC) Plating (PL) Assembly (AS) Purchasing and inventory (PI) Setup and scheduling (SS) Quality control (QC) Support costs are first traced to the six departments. The old cost accounting system allocated the service department costs to the production departments using the following cost drivers: DEPARTMENT DEPARTMENT Purchasing and inventory (PI) Setup and scheduling (SS) Quality control (QC) DEPARTMENT Machining (MC) Plating (PL) Assembly (AS) Tiger Panther Jaguar The old cost accounting system applied support costs to the three products on the basis of direct labor hours. A different cost driver rate was determined for each department. The direct labor wage rate at the plant is $ 10 per hour. PRODUCT Price $1.25 $1.20 $1.30 Tiger 7,000 3,500 2,500 Product Sales SUPPORT COSTS $ 40,000 $ 50,000 $15,000 $ 50,000 $ 120,000 $ 70,000 Direct Labor Hours (DLH) Panther 2,800 1,700 1,000 Sales Units 500,000 200,000 200,000 COST DRIVER Material costs (MAT) Direct labor hours (DLH) Machine hours (MCH) Orders 25 10 40 Jaguar 2,200 1,800 1,000 Batch-related Drivers Setups 110 43 166 Machine hours (MCH) 5,200 1,900 2,900 Material costs per unit MC PL $0.30 $0,25 $0.28 $0.10 $0.10 $0.10 The profitability of the Amazon City's plant has been declining significantly for the past three years despite the successful launch of the new product - Jaguar - which has now captured more than a 60% share of its segment of the industry. In an assiduous endeavor to understand the reasons for its deteriorating profitability, the company has appointed a special task force. List the reasons that the old cost accounting system at Petersen Pneumatic Company may be distorting its product costs.

Answer rating: 100% (QA)

The old cost accounting system at Petersen Pneumatic Company appears to be distorting its product costs for several reasons Single Cost Driver for Allocation The use of a single cost driver such as di... View the full answer