Cost Accounting-Required for Part I (Managerial/Cost Accounting)

QUESTION

Required for Part I (Managerial/Cost Accounting):Your job is to provide management with multiple (three or more) cost calculations thatcould be used to set product price for the current year (2005) and to explain/justify theamounts you calculate. You are to calculate cost, not to suggest the sells price. To keepmatters simple, you may assume that all estimated amounts are accurate (i.e., you do notneed to include any extra amount to cover unexpected additional costs).Off Road, Inc. (ORI) produces and sells a single product, a Dune Buggy. A singlemanufacturing plant in Allentown, Pennsylvania, dedicated to manufacturing DuneBuggies, is expected to run at 75% of capacity* during 2005 and produce 10 Dune Buggiesper day, which equals projected average daily demand. Production of the 3650 DuneBuggies (10 Dune Buggies per day X 365 days per year) is expected to result in thefollowing costs for the company for the year ended December 31, 2005:Corporate Office CostsSales and Marketing $650,000 **General and Administrative 900,000 ***$1,550,000Plant Costs(Allentown, PA)Plant Administration $500,000Building Depreciation (straight-line) 2,450,000Building Utilities 100,000Equipment Depreciation (units of output) 1,270,000Product Design Engineering 120,000 **Process Design Engineering 110,000 **Quality Control 90,000Purchasing 250,000Receiving 40,000Material Handling 70,000Raw Materials Used in Production 9,125,000Direct Labor ($25/hour includes benefits) 9,000,00023,125,000Other CostsResearch and Development $500,000 **Shipping 800,000Warranty costs 200,0001,500,000Total $26,175,000*In its best years, the plant ran at an average 95% of capacity (practical capacity: thehighest percentage considered attainable), but Dune Buggies are at the mature market stagewith 70-75% expected capacity utilization for the remaining life of the plant.**Included in the above costs is $700,000 related to development of a new racecar, which,if successful, will be brought to market in 2006: Sales and Marketing, $110,000; ProductDesign Engineering $100,000; Process Design Engineering $90,000; Research andDevelopment $400,000.***While some of the corporate General and Administrative Expense involved work onthe feasibility of a new racecar, no records of the corporate-level time or money spent onthe endeavor were maintained.

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