Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and

Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff and Ruff Stuff. Since inception Marconi has used only one
manufacturing-overhead cost pool to accumulate costs.

Overhead has been allocated to products based on direct-abor hours. Until recently Marconi was the sole producer of Ruff Suff and was able to dictate the
selling price.

However last year Marvella Proucts began marketing a comparable product at a price below the cost assigned by Marconi. Market share has declined rapidly
and Marconi must now decide whether to meet the competitive price or to disontinue the product line.

Recognizing that discountinuing the product line wold place an additonal burden on its remaining product Tuff Stuff management is using activity-based
costing to determine if it would show a different cost structure for the two products.

The two major indirect costs for manufacturing the products are power usage and setup costs. Most of the power is used in fabricating while most of the
setup costs are requiredin assembly. The setup costs are predominately related to Tuff Stuff product line.

A decision was made to separate the Manufacturing Department costs into two activity cost pools as follows:

Fabricating: machines hours will be the cost driver.

Assembly: number of setups will be the cost driver.

The controlller has gathered the following information.

Manufacturing Department

Annual budget before separation of overhead

Product Line

Total

Tuff Stuff

Ruff Stuff

Number of units

20000

20000

Direct labor hours

2 hrs per unit

3 hours per unit

Total direct-labor cost

800000

Direct material

5.00 per unit

3.00 per unit

Budgeted overhead:

Indirect labor

24000

Fringe benefits

5000

Indirect material

31000

Power

180000

Setup

75000

Quality assurance

10000

Other utilities

10000

Depreciation

15000

Manufacturing Department

Cost Structure after Separation of Overhead into Activity Cost Pools

Fabrication Assembly

Assembly

Direct labor cost

75%

25%

Direct material (no change)

100%

0%

Indirect labor

75%

25%

Fringe benefits

80%

20%

Indirect material

20000

11000

Power

160000

20000

Setup

5000

70000

Quality utilities

50%

50%

Depreciation

80%

80%

Cost driver

Product Line

Tuff Stuff

Ruff Stuff

Machine hrs per unit

4.00

6.00

Setups

1000

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1. Assigning overhead based on direct-labor hours calculate the following:

a. Total budgeted cost of the Manufacturing Department.

b. Unit cost of Tuff Stuff and Ruff Stuff.

2. After separation of overhead into activity cost pools compute the total budgeted cost of each department: fabricating and assembly.

3. Using activity-based costing calculate the unit costs for each product. ( In computing the pool rates for th efabricating and assembly activity cost
pools round to the nearest cent. Then in computing unit product cost round to the nearest cent).

4. Discuss how a decision regarding theproduction and pricing of Ruff Stuff will be affected by the results of your calculations in the preceding
requirements.