AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)standard and heavy. The standard bearings require $200 of direct materials per unit (per crate), and the heavy bearings require $245 of direct materials per unit. The operation is mechanized, and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit was as follows:
Per unit Standard Heavy
Direct materials cost $200.00 $245.00
Manufacturing overhead cost 124.00 93.00
Total manufacturing cost $324.00 $338.00
Sales price per unit 350.00 370.00
Gross profit per unit $26.00 $32.00
Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single plantwide allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities and broke down the annual overhead costs as shown below:
Activities: Estimated Cost
Metal fabrication $420,000
Machine processing 152,000
Packaging 17,000
Total overhead cost $589,000
Engineers believed that metal fabrication costs should be allocated by weight and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis was as given below:
Standard Heavy
Kilos per unit 2.00 4.00
Machine hours per unit 80.00 60.00
Using the data above, calculate the predetermined overhead allocation rates using activity-based costing. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings. (Round your intermediate calculations to two decimal places.)
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