Julia Mackenzie, Colin Robinson,
Jason Monaghan and Justin Corby
Managerial Accounting I
For Winston Marcellin
George Brown College
April 11, 2012
1. Introduction to Stanley Cycle
Stanley Cycle Company is a motorcycle manufacturer that deals with two subassembly lines. Their two lines are JY-63 and RX-67. The two lines are both mechanically complex, and require machining, assembly and inspection.
Stanley receives raw materials to be used in the production of these two items, and uses a First-In, First-Out inventory system. They are currently using a traditional costing method for the two products, which applies overhead based on a single cost driver. In Stanley’s case, the cost driver is currently the number of direct labor hours.
Stanley Cycle is planning to increase the costs of their products; JY-63 to $710, and RX-67 to $910. This is based on projections that material costs will not rise, but that direct labor will increase by 8% in the coming year.
2. What Problems Arise Between Traditional and ABC Costing?
Stanley Cycle currently uses a traditional absorption costing method with a single cost driver for manufacturing overhead. Their president, Jay Rexford, has been reading about Activity-Based costing and believes that this type of costing will assign a more appropriate cost to each of the two products they produce.
In a move to AB Costing, cost pools for each of the products must be assigned. For Stanley Cycle, each product requires the same cost pools, including direct labor, material handling, inspection, machining and assembly. For each of these pools, an appropriate cost driver must be assigned. Stanley must also compile information on the cost drivers for each pool, and separate them by product, to determine what costs are assigned to each product.
However, in moving from their traditional single cost driver costing system, Rexford is likely correct in his belief that AB Costing...