Cost hierarchy. Hamilton, Inc., manufactures boom boxes (music systems with radio, cassette, and compact disc players) for several well-known companies. The boom boxes differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2011:
a. Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor, $1,450,000
b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the number of purchase orders placed, $850,000
c. Cost of indirect materials, $275,000
d. Costs incurred to set up machines each time a different product needs to be manufactured, $630,000
e. Designing processes, drawing process charts, making engineering process changes for products, $775,000
f. Machine-related overhead costs such as depreciation, maintenance, production engineering, $1,500,000 (These resources relate to the activity of running the machines.)
g. Plant management, plant rent, and plant insurance, $925,000
1. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility- sustaining. Explain each answer.
2. Consider two types of boom boxes made by Hamilton, Inc. One boom box is complex to make and is produced in many batches. The other boom box is simple to make and is produced in few batches.
Suppose that Hamilton needs the same number of machine-hours to make each type of boom box and that Hamilton allocates all overhead costs using machine-hours as the only allocation base. How, if at all, would the boom boxes be miscosted? Briefly explain why.
3. How is the cost hierarchy helpful to Hamilton in managing its business?