1. Use the overhead cost activity analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for valves, pumps and flow controllers. We calculated the products costs for the three products using various overhead components.
2. Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product costing methods to produce such different results? Support your answer.
Activity analysis based costs and standard unit costs (traditional method) are different because standard unit costs calculate the overhead using the percentage of direct labor. Because the traditional method does not take into account that most of the direct labor costs are allocated to flow controllers, the unit cost of flow controllers appear cheaper in the standard unit costs. In comparing activity analysis based costs and revised unit costs, valves appear much more expensive than the activity analysis based costs. This is because the revised method allocated material overhead at a constant rate (48%).
3. Given the new accounting information, recommend three distinct actions that Destin’s managers could implement to improve profitability.
4. Assume that interest in a new basis for cost accounting at Destin Brass remains high. In the following month, actual quantities produced and sold, activities, and costs were all equal to standards (or budgets). How much higher or lower would the net income reported under the activity-transaction based system than the net income that will be reported under the present traditional system? Support your answer.