Sandy Bond, a business school graduate who had recently been employed by Huron Automotive Company, was asked by Huron’s president to review the company’s present cost accounting procedures. In outlining this project to Bond, the president had expressed three concerns about the present system: (1) its adequacy for purposes of cost control, (2) its accuracy in arriving at the true cost of products, and (3) its usefulness in providing data to judge the supervisor’s performance.

Huron Automotive was a relatively small supplier of selected vehicle parts to the large automobile and truck companies. Huron competed on a price basis with larger suppliers that were long-established in the market. Huron had competed successfully in the past by . . .

Assignment

1. Using data in the exhibits, determine the cost of a 100-unit batch of model CS-29, a month’s spare parts, and a month’s work done for other divisions under the present method, Bond’s first proposal, and his revised proposal.
2. Are the cost differences among the methods significant? What causes these differences?
3. Suppose that Huron purchased a new machine costing $400,000 for the custom work department. Its expected useful life is five years. This machine would reduce machining time and result in higher quality custom carburetors. As a result, the department’s direct labor hours would be reduced by 30 percent, and this extra labor would be transferred to departments outside the carburetor division. About 10 percent of the custom work department overhead is variable with respect to direct labor hours. Using July’s data:
   1. Calculate the plantwide hourly rate (present method) if the new machine is acquired. Then calculate costs for the custom work department in July, using both this new plantwide rate and the former $55.96 rate.
   2. Calculate the hourly rate for the custom work department only (first proposed method), assuming the machine were acquired and the first proposed costing procedure were adopted. Then calculate indicated costs for the custom work department in July, using both this new rate and the former $62.48 rate.
   3. Under the present costing procedures, what is the impact on the indicated costs of custom products if the new machine is acquired? What is this impact if the first proposed costing procedure is used? What inference do you then draw concerning the usefulness of the present and proposed methods?
4. Assume that producing a batch of 100 model CS-29 injectors requires 126 hours, distributed by department as shown in Exhibit 3, and $4,200 worth of materials. Huron sells these carburetors for $113 each. Should the CS-29 price be increased? Should the CS-29 be dropped from the product line? (Answer using both the present and the first proposed costing methods.)
5. Assume that Huron also offers a model CS-30 that is identical to a CS-29 in all important aspects, including price, but is preferred for some applications because of certain design features. Because of the CS-30’s relatively low sales volume, Huron buys certain major components for the CS-30 rather than making them in-house. The total cost of materials and purchased parts for 100 units of model CS-30 is $8,000; the labor required per 100 units is 12, 7, 17, and 35 hours respectively, in the casting/stamping, grinding, machining, and assembly departments. If a customer ordered 100 u-nits and said that either model CS-29 or CS-30 would be acceptable, which model should Huron ship? Why? (Answer using only the first proposed costing method and the assumptions regarding CS-29 from Question 4.)
6. What benefits, if any, do you see to Huron if either proposed costing method is adopted? Consider this question from the standpoint of (a) product pricing, (b) cost control, (c) inventory valuation, (d) charges to outside departments, (e) judging departmental performance, and (f) diagnostic uses of cost data. What do you conclude Huron should do regarding their costing procedures?