Posted: August 8th, 2015
Accounting
| Holly Manufacturing Case | |||||||
| Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed | |||||||
| from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods. | |||||||
| The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more | |||||||
| experienced workers who are paid at a higher rate. | |||||||
| Most of Holly’s sales come from the standard cello, but sales of the custom model have been growing. Following is the company’s sales, | |||||||
| production, and cost information for last year: | |||||||
| Cello | Standard | Custom | |||||
| Sales and production volume in units | 900 | 100 | |||||
| Unit Selling Price | $600.00 | $900.00 | |||||
| Unit costs: | |||||||
| Direct materials | $150.00 | $375.00 | |||||
| Direct labor | $180.00 | $240.00 | |||||
| Manufacturing overhead* | $135.00 | $135.00 | |||||
| Total unit costs | $465.00 | $750.00 | |||||
| Unit Gross Profit | $135.00 | $150.00 | |||||
| Direct Labor Hours | 10.00 | 10.00 | |||||
| Direct Labor Rate Per Hour | $18.00 | $24.00 | |||||
| *Manufacturing overhead costs: | |||||||
| Building depreciation | $ 40,000 | ||||||
| Maintenance | 15,000.00 | ||||||
| Purchasing | 20,000.00 | ||||||
| Inspection | 12,000.00 | ||||||
| Indirect materials | 15,000.00 | ||||||
| Supervision | 30,000.00 | ||||||
| Supplies | 3,000.00 | ||||||
| Total manufacturing overhead costs | $135,000.00 | ||||||
| These manufacturing overhead costs are fixed in nature: they do not vary with the volume of manufacturing activity. | |||||||
| The company allocates overhead costs using the traditional method. Its activity base is direct labor hours. The predetermined overhead rate, | |||||||
| based on 10,000 direct labor hours, is $13.50 ($135,000 ÷ 10,000 direct labor hours). | |||||||
| Johann Brahms, president of Holly, is concerned that the traditional cost-allocation system the company is using may not be generating accurate | |||||||
| information and that the selling price of the custom cello may not be covering its true cost. | |||||||
| Questions To Be Answered | |||||||
| 1. The cost-allocation system Holly has been using allocates 90% of overhead costs to the | |||||||
| standard cello because 90% of direct labor hours were spent on the standard model. | |||||||
| How much overhead was allocated to each of the two models last year? | |||||||
| Discuss why this might not be an accurate way to assign overhead costs to products. | |||||||
| 2. How would the use of more than one cost pool improve Holly’s cost allocation? | |||||||
| Use the data below for the questions which follow. | |||||||
| Holly’s controller developed the following data for use in activity-based costing: | |||||||
| Manufacturing | Standard | Custom | |||||
| Overhead Cost | Amount | Cost Driver | Cello | Cello | |||
| Building depreciation | $40,000 | Square footage | 3,000 | 1,000 | |||
| Maintenance | $15,000 | Direct labor hours | 9,000 | 1,000 | |||
| Purchasing | $20,000 | # of purchase orders | 1,500 | 500 | |||
| Inspection | $12,000 | # of inspections | 400 | 600 | |||
| Indirect materials | $15,000 | # of units manufactured | 900 | 100 | |||
| Supervision | $30,000 | # of inspections | 400 | 600 | |||
| Supplies | $3,000 | # of units manufactured | 900 | 100 | |||
| Total | $135,000 | ||||||
| 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each model of cello. | |||||||
| 4. Calculate the cost of a custom cello using activity-based costing. | |||||||
| 5. Why is the cost different from the cost calculated using the traditional allocation method? | |||||||
| 6. At the current selling price, is the company covering its true cost of production? Briefly discuss | |||||||
| 7. What should Holly Manufacturing do about the situation? | |||||||
| 8. What should Holly Manufacturing do if the quantity of custom cellos sold at the new price falls to 50 per year? | |||||||
| 9. What should Holly Manufacturing do about the situation if the price of the custom cello cannot exceed $900? | |||||||
| 10. At a selling price of $1,000 each, what is the breakeven unit volume for the custom cello? | |||||||
| 11. What are the lessons learned from this case? | |||||||
Expert paper writers are just a few clicks away
Place an order in 3 easy steps. Takes less than 5 mins.