Question

Problem 17-1A Comparing costs using ABC with the plantwide overhead rate LO P1, P3, A1, A2

The following data are for the two products produced by Tadros Company.

	Product A			Product B
Direct materials	$	15 per unit		$	24 per unit
Direct labor hours		0.4 DLH per unit			1.4 DLH per unit
Machine hours		0.3 MH per unit			1.0 MH per unit
Batches		95 batches			190 batches
Volume		10,000 units			2,000 units
Engineering modifications		11 modifications			55 modifications
Number of customers		500 customers			400 customers
Market price	$	34 per unit		$	120 per unit

The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows.

	Costs			Driver
Indirect manufacturing
Engineering support	$	24,000		Engineering modifications
Electricity		25,000		Machine hours
Setup costs		41,000		Batches
Nonmanufacturing
Customer service		71,000		Number of customers

Required:

(Round your per unit cost answers to 2 decimal places and other answers to nearest whole number. Loss amounts should be indicated with minus sign.)

Answer 1

1Calculation of Machine RAte per Hour

Let Machine Rate per Hour be 'x', Therefore, MH of Product A*No of Units*MHR+MH of Product B*No of Units *MHR = Total Machine Hours
Thus we can arrive with the following equation:
(0.3*x*10000)+(1*x*2000)=25000
Therefore, x = Rs. 5/- per machine hour.

COst per Unit with Plantwide O/h Rate:

Expense	Product A	Product B
			Direct materials	15	24
Direct labor hours	8	28
Direct Machine Cost	1.5	5
Other Indirect Cost (See Note)	9.66	32.2
Total cost per unit	34.16	89.2

Note: Total Indirect Cost = 25000+24000+41000+71000 = 161000
Total MAchine Hours = 25000
Therefore, Rate per MAchine Hour = 161000/25000 = 6.44/-
Other Indirect Cost = Machine Hour pu * RAte per Machine hour

As per ABC Method:

Calculation of Cost Pool
		Cost	Driver	Driver Rate	Cost per Driver
Engineering support		24,000	Engineering modifications	66	363.6363636
Electricity		25,000	Machine hours	5000	5
Setup costs		41,000	Batches	285	143.8596491
Nonmanufacturing
Customer service		71,000	Number of customers	900	78.88888889

Expense	Product A			Product B
	Cost P.U.	Cost		Cost P.U.	Cost
Direct materials	15	150000		24	48000
Direct labor hours	0.4	80000		1.4	56000
Direct Machine Cost	0.3	15000		1	10000
Engineering support	363.6363636	4,000			363.6363636
Electricity	5	15,000		5	10000
Setup costs	143.8596491	13,667		143.859649	27333.33333
Customer Service	78.88888889	39,444		78.8888889	31555.55556
Total Cost		317,111			183,253
No. of Units		10,000			2,000
Cost per Unit		32			92

Thus, for Product A Cost as per Conventional MEthod is higher by Rs. 2.16 pu whereas for Product B Cost is higher under ABC Method by Rs. 2/-