Question

Question 4 Marine Components manufactures two products: JZ500 and XR800. The company operates in a competitive market and has recently seen a decline in market share of XR 800 to aggressive competitors. Marine Components is reviewing its costing and pricing strategies to see if improvements can be made. Currently Marine Components uses a traditional costing system to assign overheads to nraduction usine direct labour hours and sets selling prices by adding 40% to a producte total cost. The budgeted overhead and labour hours for the year are $1,965,000 and 21.000 respectively. The company's records have revealed the following data regarding the company's products: JZ500 XR800 Production (units) 2,500 5,000 Direct material $44 $66 Direct labour 26 ^2 hours of direct labour are used to produce each unit of JZ500 and 3 hours per unit for XR800 The company's accountant has suggested Marine Components considers moving towards an activity-based costing system. He has provided the following information after analysing the company's manufacturing processes: Activity Setups General Manufacturing Machine processing Cost $ 250,000 1,575,000 Cost Driver Volume JZ500 XR800 Total 104 21 | 125 5,250 15,750 21,000 Cost Driver Number of setups Direct labour hours 140,000 Machine Hours 2,600 900 3,500 Required (a) Compute the per-unit cost and selling price of JZ500 and XR800 under: (i) (ii) The company's traditional costing method. Activity based costing. (Smarks) (8 marks) (b) Compare the per unit costs you calculated in (a) above. Which rate is a better reflection of the real cost of JZ500 and XR 800? Explain in your own words using the case facts to support your theoretical argument. (7 marks) (TOTAL: 20 marks)

Answer 1

Las Computation of per unit cost and selling price of Jesivo ß XR BOD. | The Company's traditional cooting method" J2500___XR800 Production units 2,500 5,000 Direct Material $44x2500 $110,000 $66x500 $3,30,000 Direct labour La Caxus (dher X$13 x 2500) ( 3hr X$13X500) $ 65000 $ 195,000 $491250 Other Budgeted cost $19650w x2x2500_ 20000 hrs face wooking note) $1965002_x3x500d 20,000 hor (fee Working $1473750 Total Cost $ 666,250 $1998,750

$_1998.750 sooo Motal Cost $666,250 No. of Units 2500 Cost ber Out $266.50 Add : Profit @ 40% --- $106:60 Delling fouie_ $373-10 per cuit $399-75 $159.90 $.559.65 L = $. 1965,000 oreking_Notes :- Total Budgeted Overhead Total Howrs J2500 (2500 units X 2 his XR 800 (3000 muito x Blero = 5000 hours _25000_lours 20,000 hours Cost per hour = $1965,000 -082,000 = $98.25 ) hour

Activity Based Casting Working Notes Activity Cost Cool Driver Allocation A Cost Schup J2 500 Schuß $250,000. No of setup 250.000.X.104_$250COD X21. 1125 125 - $209,000 42,000 lpueral $15.7 Spoo Direct_ $1575300DX.5250 $157500DXISTSO.. Manuschering laban ham d1,000 2,000 -- =$393,750 =$9,81,950 Machise $10,000 fachine $140.000X1600 $ 140,00 X900 Hour 3500 - E$104.000 -$34,020 Processing 3500 Stalement showing cost per unit & velling price per unit -J2500 XR800 Il scaduction wit -- S.00 5,000 Material cost $_110,000 $330.000 Direct labour cost $ 65,000 $195,000 1 Sckup cost $208,000_ $ 42,800 Generel Gonudacterug $.393,750 - $ 181,250

:$ 104,000____$36,00) Machine Processing cook lotal cost In Vuits ; A Cost per Unit Add Profit $ 880,750 - Soc $352.30 $1,7 84250 sooo $.356.85 Il- 140.92 142:74 Selling Price $493.22 $ 499-59 XR800_ b) Comparison of Coot fer unit LJ2500 L'Cost peo unit as per | Tradition cooking method $266:50__ Cost ber unit as per $ 352.30 Activity Based Costing (85:80 og nyelled $266:50 $399.75 $356.85 4 2.90

shate calculated from Acliveily Boxeed Costing is better roflection of Real cost of J2500 and XM800 - As in Activity Based Costing , cost is distribented on the basis of various achizily rate of products which shows I real expenses incwered for that particular Product