The current method for allocating overhead to the products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in refining the current system.
With the help of the accounting department, the manager has been able to establish the following information related to the key activities that consume the indirect resources:
The indirect labor time is spent in the following proportions: Re-tooling before each batch of products 25%Engineering Changes25%Inspecting Finished Products25%Idle Time*25%* Plant management would like to lay off a number of employees to eliminate the idle time, but unsuccessful negotiations have prevented such action so far.
Computer Resources are used entirely for production planning, and vary with the number of batches in a given period.
Utilities and Misc. Other Costs are almost entirely associated with running the machines, and so they tend to vary with the number of machine hours.
REQUIRED: Design an Activity-Based Costing System, based on the provided information, and based on this system, determine the cost per unit for each product line for July. Show your calculations on the next page Trinket Sunit Widget $unitC.
REQUIRED: Does this firm have a problem with product cost cross subsidization? Explain briefly.