Question A.3: JMJ Enterprises The JMJ Enterprises makes two models of netw...
JMJ Enterprises
The JMJ Enterprises makes two models of networking equipment for the telecommunications industry. The Alpha and Omega products have annual sales volumes of 25,000 and 40,000 units, respectively. Historically, JMJ has used a traditional (absorption-based) cost accounting system based on direct-labor hours. The costs for the current year are:
| Model Omega | Model Alpha | |
| $160,000 | $350,000 | Direct-material cost |
| 600,000 | 125,000 | Direct-labor cost |
| 60,000 | 12,500 | Direct-labor hours |
| Total manufacturing indirect costs: $698,250 |
The company is considering a switch to ABC. It has identified six main activities that drive most of the manufacturing indirect costs. The activities, their indirect costs, drivers, and usage rates are:
| Total Units | Model Omega | Model Alpha | Cost Driver | Costs | Activity |
| 14,000 | $9000 | $5000 | Machine hours | $280,000 | Production |
| 150 | 50 | 100 | Engr. change orders | 18,000 | Engineering |
| 90,000 | 40,000 | 50,000 | Material moves | 225,000 | Material handling |
| 1600 | 1000 | 600 | Batches | 12,000 | Receiving |
| 4500 | 2000 | 2500 | Inspections | 49,500 | Quality assurance |
| 65,000 | 40,000 | 25,000 | Products | 113,750 | Pack and ship |
Compare the total manufacturing costs for JMJ’s two models using the traditional and ABC methods.
Traditional Costing Method
Indirect cost rate = (Total indirect costs)/(Total direct-labor hours)
= $698,250/72,500 hours = $9.631 per direct-labor hour
| Model Omega | Model Alpha | Activity | ||
| $160,000 | $350,000 | Direct material | ||
| $600,000 | $125,000 | Direct labor | ||
| (= $60,000 · 9.631) | \underline{\$577,862} | (= $12,500 · 9.631) | \underline{\$120,388} | Allocated indirect |
| $717,250 | $595,388 | Total | ||
| $33.45 | $23.82 | Manufacturing cost/unit |
ABC Method
Each applied activity rate equals the activity cost divided by the total activity level. For example, $280,000 for 14,000 machine hours is a cost of $20 per machine hour.
| Model Omega | Model Alpha | Applied Activity Rate | Activity |
| $180,000 | $100,000 | $20/mach. hr. | Production |
| 6,000 | 12,000 | $120/engr. change order | Engineering |
| 100,000 | 125,000 | $2.50/move | Material handling |
| 7,500 | 4,500 | $7.50/batch | Receiving |
| 22,000 | 27,500 | $11/inspection | Quality assurance |
| 70,000 | 43,750 | $1.75/product | Pack and ship |
| 385,500 | $698,250 = 312,750 | Total indirect | |
| 160,000 | 350,000 | Direct material | |
| 600,000 | 125,000 | Direct labor | |
| 1,145,500 | 787,750 | Total | |
| 28.64 | 31.51 | Manufacturing cost per unit |
| Model Omega | Model Alpha | Total Manufacturing Costs |
| $33.45 | $23.82 | Traditional costing system |
| 28.64 | 31.51 | ABC system |