Scannell Industries Manufactures A Variety Of Custom Product

Scannell Industries Manufactures A Variety Of Custom Products The Com

Scannell Industries manufactures a variety of custom products. The company has traditionally used a plantwide manufacturing overhead rate based on machine hours to allocate manufacturing overhead to its products. The company estimates that it will incur $1,820,000 in total manufacturing overhead costs in the upcoming year and will use 10,000 machine hours. Hazardous waste disposal fees have been absorbed into the overhead rate and allocated to all products, but recent increases in waste disposal fees for certain products have negatively impacted profit margins. Management seeks to implement an activity-based costing (ABC) system to better understand the cost of each product, including hazardous waste disposal costs. Expected usage and costs for manufacturing overhead activities in the upcoming year are provided, and job 352 has been started and completed. Requirements include calculating the cost of job 352 using both the traditional plantwide rate and ABC, as well as evaluating which costing method provides more useful information for management decisions.

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Introduction

Cost accounting plays a pivotal role in manufacturing firms by providing accurate product costing information essential for informed managerial decision-making. Traditional costing methods, particularly plantwide overhead rates based on a single cost driver, have been the standard in many organizations due to their simplicity. However, as manufacturing processes become more complex and diverse—especially with the emergence of varied waste disposal costs—such methods may lead to cost distortions. Activity-Based Costing (ABC) offers a refined approach that assigns overhead costs more precisely based on activities that consume resources, potentially improving cost accuracy and profitability analysis. This paper explores the application of both traditional and activity-based costing methods within Scannell Industries, illustrating their calculation, comparing their effectiveness, and discussing managerial implications.

Traditional Costing Calculation for Job 352

To determine the cost of Job 352 using the traditional plantwide overhead rate, the initial step involves calculating the plantwide manufacturing overhead rate. This rate is computed by dividing the estimated total manufacturing overhead costs by the estimated total machine hours. Given the data: estimated total overhead costs of $1,820,000 and expected machine hours of 10,000, the rate calculation is straightforward:

• Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Estimated Machine Hours = $1,820,000 / 10,000 = $182 per machine hour.

Next, to find the overhead allocated to Job 352, the total machine hours used for this job are needed. Assuming that Job 352 used a specific number of machine hours (not explicitly provided but typically part of a job record), the overhead cost allocable is computed as:

• Overhead Cost for Job 352 = Machine hours used by Job 352 × $182.

Adding direct materials and direct labor costs to this overhead yields the total job cost. If the direct costs are available, they are added to overhead to obtain the full product cost using the traditional method.

Activity-Based Costing Calculation for Job 352

The ABC approach involves calculating the allocation rates for each activity based on estimated activity costs and activity driver quantities. The main activities identified include machining (based on machine hours), engineering change orders, waste disposal, and possibly others like blueprint copying or secretarial work. The general formula for activity cost driver rates is:

• Activity Rate = Estimated Activity Cost / Estimated Total Activity Driver Quantity.

Suppose we have the following estimated activity costs and driver quantities:

• Machining: $?[value] / total machine hours
• Engineering Change Orders: $?[value] / total change orders
• Waste Disposal: $?[value] / total pounds of waste

Calculating these rates enables assigning overhead costs to Job 352 based on actual activity consumption. For instance, if Job 352 involved 50 machine hours, 2 change orders, and 10 pounds of waste, the overhead would be accumulated as:

• Machining overhead = Machining activity rate × machine hours used
• Engineering change orders overhead = Engineering activity rate × number of change orders
• Waste disposal overhead = Waste disposal rate × pounds of waste

Summing these amounts with direct costs yields the total cost of Job 352 under ABC, providing a more accurate reflection of resource consumption, especially for activities like hazardous waste disposal that are not adequately captured by the plantwide rate.

Comparison of Costing Methods and Managerial Insights

The traditional plantwide overhead rate offers a simplified, easy-to-compute estimate but may distort costs—particularly when certain products incur disproportionately higher waste disposal fees. ABC, by allocating costs based on actual activity consumption, enables managers to identify high-cost activities and products, facilitating targeted process improvements and pricing strategies. This detailed understanding supports more strategic decisions, such as product pricing, identification of unprofitable products, and process optimization to reduce waste disposal costs.

Using ABC can reveal hidden cost drivers and improve profitability analysis. For example, products generating more hazardous waste can be identified clearly and managed effectively. Conversely, the traditional method might understate or overstate costs, leading to less informed decisions and potential profit erosion.

Conclusion

Accurate product costing is essential for competitiveness and profitability in manufacturing. While traditional costing methods are simpler, they may not sufficiently reflect the true resource consumption, especially with increasing environmental and waste management costs. Activity-Based Costing provides a more detailed and accurate costing approach, capturing complex resource usage patterns. For companies like Scannell Industries, adopting ABC can lead to better cost control, pricing, and strategic decision-making by aligning product costs more closely with actual activities and resource consumption.

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