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Cincinnati Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing

18 / 01 / 2019 Research Papers

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Cincinnati Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing… 1 answer below » Cincinnati Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing motorcycles. The company is currently using an absorption costing system that applies overhead based on direct-labor hours. The budget for the current year ending December 31, 20×4 is as follows: Sales in units …………………………………… JY-63 5,000 RX-67 5,000 Total 10,000 Sales revenue ………………………………….. $ 3,400,000 $ 4,400,000 $ 7,800,000 Cost of goods manufactured and sold: Beginning finished-goods inventory ………. $  480,000 $  600,000 $ 1,080,000 Add: Direct material ………………………….. 2,000,000 3,500,000 5,500,000 Direct labor ……………………………… 370,370 185,186 555,556 Applied manufacturing overhead* …. 1,088,050 544,026 1,632,076 Cost of goods available for sale ……………. $ 3,938,420 $ 4,829,212 $ 8,767,632 Less: Ending finished-goods inventory …… 480,000 600,000 1,080,000 Cost of goods sold ……………………………. $ 3,458,420 $ 4,229,212 $ 7,687,632 Gross margin …………………………………… $  (58,420) $  170,788 $  112,368 *Applied on the basis of direct-labor hours: Machining ………………………………… $ 849,056 Assembly …………………………………. 433,962 Material handling ……………………….. 113,208 Inspection ………………………………… 235,850 Total …………………………………….. $1,632,076 Jay Rexford, Cincinnati Cycle’s president, has been reading about a new type of costing method called activity-based costing. Rexford is convinced that activity-based costing will cast a new light on future profits. As a result, Jack Canfield, the company’s director of cost management, has accumulated cost pool information for this year shown on the following chart. This information is based on a product mix of 5,000 units of JY-63 and 5,000 units of RX-67. Cost Pool Information for 20×4 Cost Pool Direct labor …………………. Activity Direct-labor hours (per product line) ………………… JY-63 10,000 RX-67 5,000 Material handling ………….. Number of parts (per unit) …………………………….. 5 10 Inspection …………………… Inspection hours (per product line) ………………….. 5,000 7,500 Machining …………………… Machine hours (per product line) …………………….. 15,000 30,000 Assembly ……………………. Assembly hours (per product line) …………………… 6,000 5,500 In addition, the following information is projected for the next calendar year, 20×5. JY-63 RX-67 Sales (in units) ………………………………………………………………………………………… 5,100 4,900 Beginning inventory, finished goods (in units) …………………………………………………. 800 600 Ending  inventory, finished  goods  (in  units) ……………………………………………………… 700 700 On January 1, 20×5, Rexford is planning to increase the prices of JY-63 to $710 and RX-67 to $910. Material costs are not expected to increase in 20×5, but direct labor will increase by 8 percent, and all manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process, the company does not have any beginning or ending work-in-process inventories. Cincinnati Cycle Company uses a just-in-time inventory system and has materials delivered to the production facility directly from the vendors. The raw-material inventory both at the beginning and the end of the month is immaterial and can be ignored for the purposes of a budgeted income statement. The company uses the first-in, first-out (FIFO) inventory method. Required: 1. Explain how activity-based costing differs from traditional prod…


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