Whitestone Company produces two subassemblies, JR-14 and RM-13, used in manufacturing trucks. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20x1, is as follows: WHITESTONE COMPANY
Budgeted Statement of Gross Margin for 20x1
JR-14 RM-13 Total
Sales in units 5,000 5,000 10,000
Sales revenue $ 1,700,000 $2,200,000 $3,900,000
Cost of goods manufactured and sold:
Beginning finished-goods inventory $240,000 $300,000 $540,000
Add: Direct material 1,000,000 1,750,000 2,750,000
Direct labor 185,185 92,593 277,778
Applied manufacturing overhead* 544,025 272,013 816,038
Cost of goods available for sale $1,969,210 $2,414,606 $4,383,816
Less: Ending finished-goods inventory240,000 300,000 540,000
Cost of goods sold 1,729,210 $2,114,606 $3,843,816
Gross margin $ (29,210) $85,394 $56,184
*Applied on the basis of direct-labor hours:
Machining $ 424,528
Assembly 216,981
Material handling 56,604
Inspection 117,925
Total $ 816,038
Mark Ward, Whitestone’s president, has been reading about a product-costing method called activity-based costing. Ward is convinced that activity-based costing will cast a new light on future profits. As a result, Brian Walters, Whitestone’s director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JR-14 and 5,000 units of RM-13.
Cost Pool Information for 20x1
Cost Pool Activity JR-14 RM-13
Direct labor Direct-labor hours 10,000 5,000
Machining Machine hours 15,000 30,000
Assembly Assembly hours 6,000 5,500
Material handling Number of parts 5 10
Inspection Inspection hours 5,000 7,500
In addition, the following information is projected for the next calendar year, 20x2.
JR-14 RM-13
Beginning inventory, finished goods (in units) 800 600
Ending inventory, finished goods (in units) 700 700
Sales (in units) 5,100 4,900
On January 1, 20x2, Whitestone is planning to increase the prices of JR-14 to $355 and RM-13 to $455. Material costs are not expected to increase in 20x2, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories.
Whitestone uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory at both the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method.
Required:
1. Using activity-based costing, calculate the total cost for the following activity cost pools: machining, assembly, material handling, and inspection. (Round to the nearest dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four activities.
2. Prepare a table showing for each product line the estimated 20x2 cost for each of the following cost elements: direct material, direct labor, machining, assembly, material handling, and inspection.
3. Prepare a budgeted statement showing the gross margin for Whitestone Company for 20x2, using activity-based costing.