Overview
In this assignment, you will play the role of a senior analyst.
You work for Blackhawk Company, a lighting fixture manufacturer.
Upper management at Blackhawk is concerned with the traditional costing system it has relied on for the past few years. In particular, upper management is concerned about the accuracy of cost information and thus has ordered a āpilotā test of an activity-based costing approach.
You will receive an analysis prepared by your junior staff. Your task is to interpret the analysis, and communicate related implications and other considerations.
Note: Please read all of the provided information, including the required deliverables, before beginning the assignment.
Case Information
Use the information provided here to answer the questions.
Blackhawk Company manufactures and sells many different types of lighting fixtures.
Historically, indirect costs have been allocated to products based on direct labor dollars, via a traditional costing system. The overhead rate is pre-determined, based on budgeted volumes and budgeted direct labor.
For the upcoming year, Blackhawk compiled the following projected per-unit information for its deluxe model ā one of many products that Blackhawk produces and sells.
Product Information (Traditional Costing System)
Selling price $900
Direct materials $250
Direct labor $120
Indirect costs $340
Profit per unit $190
The CFO has suggested that an activity-based costing system could be valuable to help facilitate strategic and operational decisions for the coming year. She ordered a pilot test of the activity-based costing system using the deluxe product.
Your staff obtained the following information to compute an activity-based version of the deluxe productās cost.
Note: These totals are company-wide (i.e., not just for the deluxe model).
| Activity | Cost Driver | Cost | Total Cost |
| Setups | # batches | $500,000 | 725 batches |
| Machine-related | # of machine-hours | $44,100,000 | 650,000 MHs |
| Packing | # of shipments | $5,000,000 | 250,000 shipments |
In addition, the following information is known for the deluxe model.
Number of units per batch = 125
Number of machine hours per unit = 10
Number of units per shipment = 1
Analysis
A junior staff member provided the following analysis.
Activity Pool Rates
Setups: $500,000 / 725 batches = $689.66 per batch
Machine time: $44,100,000 / 650,000 machine hrs = $67.85 per machine hr
Packing: $5,000,000 / 250,000 shipments = $20 per shipment
Using the activity pool rates and the estimated usage of each activity by the deluxe model, the junior analyst provided the following cost estimate on aĀ per unit basis:
Setups: $689.66 per batch / (125 units per batch) = $5.52 per unit
Machine time: $67.85 per machine hour x 10 machine hours per unit = $678.50 per unit
Packing: $20 per shipment / (1 unit per shipment) = $20 per unit
Total per unit cost = $5.52 + $678.50 + $20 = 704.02
The analyst also provided the revised profit per unit information:
Selling price = $900
Revised costs (rounded) (per activity-based costing) = $704
Profit per unit = $900 – 704 = $196
The analyst noted that the per-unit cost, as well as the profit per unit were approximately equivalent across the two systems (i.e., the original/traditional system and the activity-based costing system).
Given this small difference, the analyst concluded that the original system is reasonably accurate, and that activity-based costing may not be worthwhile for Blackhawk Company.
Please submit your answer for each of the two questions based on the information provided to you. Each of your answers will be evaluated based on how completely you have addressed the question
