Solved: The Bangor Manufacturing Company makes

mechanical toy robots tha

The Bangor Manufacturing Company makes mechanical toy robots that are typically produced
in batches of 250 units. Prior to the current year, the company’s accountants used a standard
cost system with a simplified method of assigning manufacturing support (i.e., overhead) costs
to products: all such costs were allocated to outputs based on the standard machine hours
allowed for output produced. You have recently joined the accounting team and are developing
a proposal that the company adopt an ABC system for both product-costing and control
purposes. To illustrate the benefit of such a system in terms of the latter, you decide to put
together an analysis of batch-related overhead costs. You chose these costs because a
previous investigation indicated that there is both a variable component to these costs
(materials plus power) plus a fixed component (depreciation and salaries). Last year’s budget
indicated that the variable overhead cost per setup hour was $20 and that the fixed overhead
production setup costs per year were $20,000. Output was budgeted at 10,000 units for the
year. Typically a batch takes four hours of setup time. For cost-control purposes, assume that
the flexible budget is based on the budgeted number of setup hours for the output of the period.
You have also collected data regarding actual results for the past year. Specifically, the
company produced (and sold) 9,000 toy robots, which were produced in an average batch size
of 200 units. The actual setup hours per batch last year turned out to be 4.25 hours and the
actual variable overhead cost per setup hour was $19. Actual fixed setup-related overhead
costs were $21,000 last year.
Your discussion with the company controller indicates that under the previous accounting
system, all setup-related overhead costs were allocated to production based on machine hours.
The standard machine hours allowed per unit produced was 1.50 hours. The denominator
activity level assumed for applying fixed manufacturing support costs to units produced was
15,000 machine hours.

Required
1. Under the ABC approach, what was the (a) spending variance, and (b) production-volume
variance last year for the fixed setup-related overhead costs described above? How would you
explain these results to management?
2. Under the ABC approach, what was the (a) spending variance, and (b) efficiency variance
last year for the variable setup-related overhead costs described above? How would you explain
these results to management?
3. Write a brief statement outlining the projected costs and benefits of using an ABC approach
for the day-to-day control of the overhead costs referred to above as compared to the use of a
more traditional cost system.
4. The Bangor Manufacturing Company is currently experiencing severe cost-based pressure
from foreign competitors. As such, top management of the company is interested in improving
the existing financial-control system in the organization. What other recommendation might you
have for management in this regard? That is, what do you recommend to accompany the type
of financial analysis referred to above?

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