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Direct materials
$454,995
$319,155
$ 774,150
Direct manufacturing labor
113,000
99,000
212,000
Setup
($320 × 120; 80 batches)
38,400
25,600
64,000
Shipping
($365 × 120; 80 batches)
43,800
29,200
73,000
Design
($42,250 × 2; 2 designs)
84,500
84,500
169,000
Plant utilities and administration
($52 × 1,665; 2,585 hours)
86,580
134,420
221,000
Budgeted total costs
$821,275
$691,875
$1,513,150
Divided by number of backpacks/purses
÷ 6,175
÷ 3,075
Budgeted cost per backpack/purse
$ 133.00
$ 225.00
5. Based on this analysis, more than 50% of product cost relates to direct material. Managers
should determine whether the material costs can be reduced. Producing in small lots increases the
setup and shipping costs. While both are relatively small components of product cost, management
may want to evaluate ways to reduce the number of setups and the cost per setup. Of the indirect
costs, the product- and facility-sustaining costs are the highest. Management should review the
design process for cost savings and examine why it takes so long to produce purses relative to
backpacks.
5-38 (40 min.) ABC, health care.
Crosstown Health Center runs two programs: drug addict rehabilitation and aftercare (counseling
and support of patients after release from a mental hospital). The center’s budget for 2014 follows.
Kim Yu, the director of the center, is keen on determining the cost of each program. Yu compiled
the following data describing employee allocations to individual programs:
Equipment and maintenance = $115,200 ÷ 24,000 machine-hours = $4.80 per machine-hour.
Lease rent, insurance, utilities = $210,000 ÷ 14,000 sq. ft. of capacity = $15 per sq. ft.
Capacity used for Capacity used for
2. Unused capacity Total capacity =−
basketball production volleyball production
−
14,000 3,200 8,000 2,800 sq. ft.= − − =
Cost of unused capacity = $15 per sq. ft × 2,800 sq. ft. = $42,000
3.
Basketballs
Volleyballs
Total
Direct materials
$168,100
$303,280
$ 471,380
Direct manufacturing labor
111,800
100,820
212,620
Setup
($210 × 450; 300)
94,500
63,000
157,500
Equipment and maintenance
($4.80 × 13,500; 10,500)
64,800
50,400
115,200
Lease rent, etc.
($15 × 3,200; 8,000)
48,000
120,000
168,000
Budgeted total costs
$487,200
$637,500
$1,124,700
Divided by number of units
÷ 58,000
÷ 85,000
Budgeted cost per unit
$ 8.40
$ 7.50
4. Currently, Zarson’s only utilizes 80% of its available capacity. Managers should consider
whether the excess capacity is sufficient to produce footballs. Other issues to consider include
demand for the proposed product, the competition, capital investment needed to start and support
this product line, and the availability of skilled and unskilled labor needed to manufacture
footballs.
Equipment and maintenance = $115,200 ÷ 24,000 machine-hours = $4.80 per machine-hour.
Capacity used for Capacity used for
2. Unused capacity Total capacity =−
basketball production volleyball production
−
14,000 3,200 8,000 2,800 sq. ft.= − − =
