Posted: April 19th, 2016
Farragut, Inc., uses activity-based costing to account for its chrome bumper
manufacturing process. Company managers have identified four manufacturing activities:
materials handling, machine setup, insertion of parts, and finishing. The budgeted
activity costs for 2010 and their allocation bases are as follows:
Activity Total Budget Cost Allocation Base
Materials Handling $ 6,000 Number of Parts
Machine Setup 3,300 Number of Setups
Insertion of Parts 54,000 Number of Parts
Finishing 80,000 Finishing direct labor hours
Farragut expects to produce 1,000 chrome bumpers during the year. The bumpers
are expected to use 3,000 parts, require 20 setups, and consume 2,000 hours of
1. Compute the cost allocation rate for each activity.
2. Compute the indirect manufacturing cost of each bumper.
Types of Cost Behavior
Identify the following planned costs as (a) purely variable costs, (b) discretionary fixed costs, (c) committed fixed costs, (d) mixed costs, or (e) step costs. For purely variable costs and mixed costs, indicate the most likely cost driver.
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Beverly High Fashions Company manufactured and sold 1,000 pair of leather handbags during July. Selected data for this month follow:
Direct materials used 31,000
Direct labor 16,000
Variable manufacturing overhead 13,000
Fixed manufacturing overhead 11,000
Variable selling and administrative expenses ?
Fixed selling and administrative expenses ?
Contribution margin 40,000
Operating income 22,000
There were no beginning or ending inventories.
1. What were the variable selling and administrative expenses for July?
2. What were the fixed selling and administrative expenses for July?
3. What was the cost of goods sold during July?
4. Without prejudice to your earlier answers, assume that the fixed selling and administrative expenses for July amounted to $4,000.
a. What was the break-even point in units for July?
b. How many units must be sold to earn a target operating income of $14,000?
c. What would the selling price per unit have to be if the company wanted to earn an operating income of $22,500 on the sale of 900 units?
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