Several years after reengineering its production process, Enke, Inc., hired a new controller, Natalie Babin. She developed an ABC system very similar to the one used by Enke’s chief rival, Northstar, Inc., of Exercise 25-1. Part of the reason Babin developed the ABC system was that Enke’s profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, Enke had used a direct labor hour single-allocation-base system that was developed 20 years ago.

For 20X6, Enke’s budgeted ABC allocation rates are

The number of parts is now a feasible allocation base because Enke recently purchased bar coding technology. Enke produces two wheel models: standard and deluxe. Budgeted data for 20X6 are as follows:

The company’s managers expect to produce 1,000 units of each model during the year.

Required

1. Compute the total budgeted indirect manufacturing cost for 20X6.

2. Compute the ABC indirect manufacturing cost per unit of each model.

3. Using Enke’s old direct labor hour single-allocation-base system, compute the (single) allocation rate based on direct labor hours. Use this rate to determine the indirect manufacturing cost per wheel for each model under the old single-allocation-base method.

Exercise 25-1:

Northstar Inc., uses activity-based costing to account for its chrome wheel manufacturing process. Company managers have identified four manufacturing activities: materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs for 20X6 and their allocation bases are as follows:

Northstar, Inc., expects to produce 1,000 chrome wheels during the year. The wheels are expected to use 3,000 parts, require 10 setups, and consume 2,000 hours of finishing time.

Required

1. Compute the cost allocation rate for each activity.

2. Compute the indirect manufacturing cost of each wheel.