Lately Twisty Noodles, a Regional Factory That Manufactures Various Kinds

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The Answer is a. ABC requires that MOH be allocated based upon a per-unit cost and quantity of each activity. To calculate the per unit cost, take the cost of each key activity/cost driver, and divide it by the amount of that activity/driver. These costs will be calculated as follows:
Machining: $40,710/22,444 hours = $1.81 per hour
Moving and Sorting: $44,928/18,428 hours = $2.44 per hour
Cleaning wages: $18,228/7,084 hours = $2.57 per hour
Factory utilities: $62,829/14,479 square feet = $4.34 per square foot
Under traditional costing, the manufacturing overhead costs are divided by a single cost driver, such as direct labor hours or a percentage of direct labor costs. Both methods incur the same direct materials and direct labor costs, so it is the MOH allocation that varies. ABC costing is often considered when management believes that it will do a more efficient and transparent job of allocating costs based upon activity rather than assuming that overhead is incurred proportionally with volume.
b. $3.98 per box of angel hair pasta under traditional, $4.86 per box of angel hair pasta under ABC
Under both ABC and traditional costing, calculate the overall Direct Materials costs:
Wheat Pasta
48,990 boxes × ($0.33 per pound × 0.50 pounds per box) = $8,083.35
Cardboard
48,990 boxes × $0.10 per box = $4,899.00
Total Direct Materials =
$8,083.35 + $4,899.00 = $12,982.35
Next, calculate the Direct Labor cost:
Assembly Line Wages
48,990 boxes × ($8.25 per hour × 0.10 hours per box) = $40,416.75
Machine Operators Wages
48,990 boxes × ($7.75 per hour × 0.15 hours per box) = $56,950.88
Total Direct Labor =
$40,416.75 + $56,950.88 = $97,367.63
Next, calculate the MOH under traditional:
$97,367.63 × 87% = $84,709.84
Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing.
$12,982.35 + $97,367.63 + $84,709.84 = $195,059.82
Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:
$195,059.82/48,990 boxes = $3.98 per box of angel hair pasta under traditional
Next, calculate the MOH under ABC:
($1.81 × 13,742 machining hours) + ($2.44 × 14,650 moving and sorting hours) + ($2.57 × 8,778 cleaning hours) + ($4.34 × 10,266 square feet) = $24,873.02 + $35,746.00 + $22,559.46 + $44,554.44 = $127,732.92
Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC.
$12,982.35 + $97,367.63 + $127,732.92 = $238,082.90
Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:
$238,082.90/48,990 boxes = $4.86 per box of angel hair pasta under ABC
c. $5.52 per box of penne pasta under traditional, $6.07 per box of penne pasta under ABC
Under both ABC and traditional costing, calculate the overall Direct Materials costs:
Wheat Pasta
33,806 boxes × $0.16 per pound × 1 pounds per box = $5,408.96
Cardboard
33,806 boxes × $0.15 per box = $5,070.90
Total Direct Materials =
$5,408.96 + $5,070.90 = $10,479.86
Next, calculate the Direct Labor costs:
Assembly Line Wages
33,806 boxes × ($8.25 per hour × 0.15 hours per box) = $41,834.93
Machine Operators Wages
33,806 boxes × ($7.75 per hour × 0.20 hours per box) = $52,399.30
Total Direct Labor =
$41,834.93 + $52,399.30 = $94,234.23
Next, calculate the MOH using traditional costing:
$94,234.23 × 87% = $81,983.78
Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing.
$10,479.86 + $94,234.23 + $81,983.78 = $186,697.87
Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:
$186,697.87/33,806 boxes = $5.52 per box of penne pasta under traditional
Next, calculate the MOH using ABC:
($1.81 × 11,702 machining hours) + ($2.44 × 11,778 moving and sorting hours) + ($2.57 × 5,804 cleaning hours) + ($4.34 × 8,213 square feet) = $21,180.62 + $28,738.32 + $14,916.28 + $35,644.42 = $100,479.64
Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC.
$10,479.86 + $94,234.23 + $100,479.64 = $205,193.73
Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:
$205,193.73/33,806 boxes = $6.07 per box of penne pasta under ABC
d. Traditional costing uses a single cost driver to allocate the manufacturing overhead costs of an organization. ABC uses multiple cost drivers as determined by the key activities identified by those in charge of making budgeting and financial decisions. Traditional costing assumes that all overhead costs are primarily driven by one cost driver, even if this does not accurately depict the way that the business operates. Tom will likely suggest the use of ABC as it does a more accurate job of assessing how costs are being used amongst the various activities employed by Twisty Noodles.
e. If production were to increase by 10% in the following years, this would directly impact direct materials costs, direct labor costs, and MOH whether they use traditional costing or ABC. As the production of products increases, the overall costs will also increase. Tom could begin to conduct a more thorough analysis if he was able to determine the overall cost and quantity of each cost driver for the following year. In regards to the new product offering, Tom would need to gather information pertaining to costing involved in the direct materials and direct labor and then to determine this new product's impact on MOH costs. Once this is completed, Tom could begin to allocate the MOH costs under ABC and compare them to what a traditional costing system would yield. It is likely that these changes would not provoke a different response than was arrived at in part (d). As more product lines are offered, ABC becomes a more appealing costing method.

Lately Twisty Noodles, a Regional Factory That Manufactures Various Kinds

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Lately Twisty Noodles, a Regional Factory That Manufactures Various Kinds

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