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The Band Company is a publicly traded corporation that produces different types of digital control systems.My name is Alan Smith and I have worked for this company for the last ten years in the controller's office.I was both an accounting and finance major in university.The company currently produces 300 products and does not anticipate any new products coming out over the next three years.I have previously mentioned to my superiors that it is not appropriate for our firm to use a traditional accounting system (where overhead costs are allocated across products at a rate of 500% of direct labor costs) when different products require different amounts of indirect resources. For example, under the traditional system all costs associated with testing of products for quality assurance purposes are part of overhead costs and therefore allocated across products based on direct labor costs.Yet, some of our products require as much as 5 hours of testing whereas some products require less than 1 minute of testing with no connection to direct labor costs.Given that traditional costing systems result in significant cost distortions when determining products costs and given that the firm now has revenues of over $800,000,000 a year, Band has decided to adopt activity-based costing over the next year or two.

Band's management has hired Sabley Consulting to help us implement activity-based costing.I will be acting as the liaison between our firm and Sabley.As part of the initial implementation phase, I have asked Sabley to derive the costs associated with two of our products, RT8 and FG7, so that these costs could be compared with the costs under our current traditional accounting system.I picked these products since Band management believe they have very different demands on indirect resources.Further, RT8 is sold in large quantities whereas FG7 is sold in small quantities and traditional accounting systems can cause large cost distortions in different directions for products sold in large and small quantities.

Current information from our existing system on a per unit basis is shown in Exhibit 1.

Exhibit 1RT8FG7

Direct material

$6.00

$11.00

Direct labor hours

0.4

0.4

Direct labor cost per hour

$40.00

$40.00

Sales price per unit

$110.00

$115.00

My staff has identified for Band five cost pools.Information on those cost pools and the related allocation bases are provided in Exhibit 2.

Exhibit 2

Total Costs

Allocation Base

Value of Allocation Base

Equipment setups

$16,800,000

Number of setups

120,000

Purchase orders

$4,600,000

number of purchase orders

100,000

Machining

$78,000,000

number of machine hours

1,500,000

Testing

$40,800,000

number of testing hours

1,200,000

Packaging

$27,000,000

number of containers

1,800,000

Total Overhead Costs

$167,200,000

Total direct labor costs for the firm is $33,440,000.

Although fixed costs are lumped in with variable costs across the five different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs.Hence, machining costs will be treated as entirely fixed with respect to machine hours.Each machine is used in the production of multiple product lines.

We will assume that costs associated with equipment setups, purchase orders, testing, and packaging are variable with respect to their respective allocation bases.Currently, we believe our assumptions on cost behavior patterns are quite reasonable.

All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed.Units of product are packaged in containers and sent to distributors.

Production volumes are set equal to sales volumes since the company only produces products that they have orders for.Consequently, the firm never has a beginning work in process inventory, or a beginning finished goods inventory.(Hence, the firm never has ending inventories.)

Further information on our two products are provided in Exhibit 3

Exhibit 3

RT8FG7

annual sales and production in units

160,000

4,500

number of units per batch

100

10

number of purchase orders

400

600

number of machine hours per unit

0.50

0.90

total number of testing hours

5,000

6,000

total number of containers

2,000

2,250

REQUIRED: All calculations should be to two decimal points.

1.Determine the unit product cost of RT8, and its cost components, using the traditional accounting system where overhead is applied at a rate of 500% of direct labor costs.All calculations should be rounded to the nearest cent.

RT8

Direct material cost per unit_______

Direct labor cost per unit_______

Manufacturing overhead cost per unit _______

Unit product cost_______

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