Alternative Costing Method

 

Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:

 

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

 

In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.  

 

 

 

An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:

 

Stick Collapsible

Units Sold 60,000  3,000  

Selling Price $12.50 $14.00

Direct Material Cost per Unit $3  $3.10  

Direct Labor Cost per Hour $7.50  $8.00  

Variable Manufacturing Overhead $0.40  $0.40  

Variable Selling Costs $1.10  $1.10  

Labor Hours per Unit 0.2 0.2

Sales Orders 120 1

Purchase Orders 50 3

Production Runs 45 6

Material Moves 86 10

Machine Setups 130 6

Machine Hours 525 32

Inspections 200 10

Shipments 60 3

Table 1: Direct Cost Information and Activities

 

Activity Activity Cost Activity Cost Driver

Order Processing $35,000  Number of Sales Orders

Purchasing $36,000  Number of Purchase Orders

Material Handing $28,000  Material Moves

Machine Setup $14,000  Machine Setups

Production $99,000  Production Runs

Assembly $80,000  Machine Hours

Inspecting $11,000  Number of Inspections

Shipping $7,500  Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

 

Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.

 

 

Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV: