Question

Exhibit 3 Specialty Products Inc., manufactures household items sold at trade shows. The items, classified as either Trinkets or Widgets are manufactured on a common assembly line. Other than indirect labor (discussed further below), the plant operates at full capacity. The current cost accounting system allocates all overhead to the two products on the basis of machine hours. The following information applies to the month of July Trinkets SO Widgets 35 350 Number of Batches Produced Number of Units Number of Machine Hours Number of Inspections Number Engineering Changes 2400 1600 Total 115 2750 1775 175 Direct Labor Salary & Benefits per Unit Direct Material per Unit SAO S14 The General Ledger ako shows that the following amounts were spent on indirect resources: Indirect Labor Salaries and Benefits Computer Resources Utilities & Misc. Other $36,000 S12.000 $25.000 $73,000 A REQUIRED: Using the current cost accounting system, what cost per unit would be reported for the two products for the month of July? Trinkets unit Widgets /unit

Answer 1

0 Solution A Uring the current cost accounting System (Traditional costing), Calculation of cost of each product for the mouth of July. Conly using the machine hour berse) Values Values given in given a 12 question : Trinkets Total No. q inits ( 2400 380 2750 No. & Machine houss (2) 1600 175 = 1775 Direct labor salary & Beu. P.U (3) $40 $26 Direct material P. V. (4) $14 $ 8. Widgets Spendings on Indirect Resources: 3600 Inelised labore salaries & benifits 12ao Compuses Resources gruo velizies se Misc. Others 73000 Total Indirect Expenses are allocated on the bans of machine hours : Total Indirect Expenses = 73600 Total Machine Has 1775 Indirect cost per hous & & 41.127 1 Trinkets Widget Indirect Cost for allocation (1) 65803 7197 7 Зето 1775 1775 350 No. of units produced 2400 in Per unit cost (cis (1) 27.42 2056 [Indirect cost] 73000

Toinkets Dizeet Direct Direet Cost Per Uniti labour Salony & Benifits.o. Material fer vuit Nidget * 36 $40 $34 $54 $27642 $20:56 Total Direct Cost p.o. Add Indirect last p.u. Ccalculated above) Total Cost p.o. (81.42 $ 54.56 o Beuifite p. . & B Calculation of cost per vuit as per - Based activity costing : for this, we need to allocate cost drivers as per the activity o Indirect labour time is divided as follows :? Total Indirect labey Sabrius Lewitib = 36000/- . . Cest Cost Drives Retooling before each batch of product 25t. 9000 No. of Batches Engineering charges 25t. 9000 No. of Engineering changes Taspecting dinished Product 25.1. son No. of Inspections Sodle tune Disect laboo Sabry & 251. on goro 12000 No. & Batches Computer Resouses 25000 Misc. Others No. q Machines Hos. Utilities & in Cost ber mit as per cost doivers: Ratios Trinket Widget Retacting changes No. of Batches 3 No. 9 Eng. changes No Q Erspections 175 est incis is allocated on the basis of ratios in is: Widget Retooling (9000 - 80:35) 6261 27 39 Eng. charges (9000 - 1:3) 2250 6750 Inspeeting (9000 160:70) Idle time (9000 - 40:26) 80 34 160 70 26 pome moratione a mary le besign con Trinkets 6261 5455 2739 3545

Computer Resources [12000 - 80:35 8348 Utilities & Misc. Others (25000 - 1000:175] 22535 Total Indirect Cost a 51110 No. of venits Produced (6) 2400 Indirect cost pescuit (a) = (b)) 21.30 Direct Labor salary & Benifit P.. . Direct reaterial per unit Total Cost per unit 3652 2465 21890 350 62.54 40 9654 75.3

	Amount in $
Method of Costing Used	Cost per Unit
	Trinkets	Widgets
Traditional Costing	81.42	54.56
ABC Costing	75.3	96.54
Yes, this firm have a problem with product cost cross subsidization, as the cost per unit calculated as per ABC costing of Trinkets is $ 75.3 & Widgets is $ 96.54 whereas, as per traditional costing method cost per unit of Trinkets was $ 81.42 and Widgets was $ 54.56. In this case, product Trinkets is cross-subsidizing product Widgets. Since ABC costing determines the cost of the product based on all the activities associated with production, it reveals the existing product cost cross-subsidization problems.

Note: As the labor hours were not available, therefore, the idle time cost was allocated on the basis of direct labor cost per unit.