$500,000

The company president believes that it’s foolish to continue producing two essentially equivalent products. At the same time, the corporate image is somewhat tarnished because of a toxic dump found at another site (not the Valley plant). The president would like to be able to point to the Valley plant as an example of company research and development (R&D) working to provide an environmentally friendly product. The controller points out to the president that the company’s financial position is shaky, and it cannot afford to make products in any way other than the most cost-efficient one.

Required:

a. 3C’s current cost accounting system charges overhead to products based on direct labor cost using a single plantwide rate. What product costs will it report for the two products if the current allocation system is used?

b. The controller recently completed an executive education course describing the two-stage allocation procedure. Assume that the first stage allocates costs to departments and the second stage allocates costs to products. The controller believes that the costs will be more accurate if machine-hours are used to allocate Production Department costs and labor-hours are used to allocate Assembly Department costs. What product costs will be reported for the two products if the two-stage allocation process is used?

2

c. The company decides to compute product costs assuming an ABC system is implemented only in the Production Department. Overhead in Assembly will continue to be allocated based on direct labor cost. The cost drivers selected for the activity-based costing system are:

Supervision

Testing

Depreciation on equipment

Direct labor-hours

Testing hours

Machine-hours

What product costs would be reported if this ABC system were implemented? Assume that the production mix and costs would remain as originally planned.

d. Please briefly discuss the advantages and disadvantages of the three cost allocation methods above, including traditional single plantwide rate cost allocation, two-stage departmental allocation, and activity-based costing. What is your suggestion for the president if you were the controller?

e. Because the two products are identical in their use, the controller argues that the decision should be made on cost alone. Do you agree? Explain.