Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 17

Benefits of Activity-Based Costing
Cawker Products has two manufacturing facilities-Lucas plant and Russell plant-that produce the same product. Until recently, the production process in both plants has been the same. Last year, the Russell production supervisor, Ann Tyler, determined that she could use lower-cost utility labor in place of the skilled direct labor to bring raw materials to the assembly line and move finished products to the warehouse. While the total time required remained the same, the new material handling process was included in overhead rather than being considered as direct labor. Staffing at the Russell plant was adjusted to reflect the change.
In looking over the production plans for next year, Jason Hunter, the CEO of Cawker Products, is surprised by the cost estimates for the two plants. Specifically, he notes that the overhead rate, which had been comparable between the two plants, is now much higher at the Russell plant. He suggests moving some of the production to Lucas to save money.
Required
Prepare a report that states how an activity-based costing system might benefit Cawker Products and clear up the CEO's confusion.
(CMA adapted)