Question

in relation to my last question there was an question I did not post and forgot here is the fourth question.

1. Calculate the manufacturing activity cost rate for each activity using ABC.

2. Calculate the unit cost of each model using ABC.

3. Assume the company currently allocates indirect manufacturing overhead on the basis of direct labour costs. Calculate the unit cost of each model using direct labour traditional method.

4. Compare the unit costs of each model calculated in parts 2 and 3 and compare the

results.

My previous question was answered by Lalitha.

the solutions were as follows.

.Manufacturing activity cost rate for each activity using ABC.
1	2	3	4	5	6=5/4	Per activity
Cost category	Activity rate		Total(2+3)	Cost($)
Equipment setup	10 setups	15 setups	25	75000	3000	per set-up
Machine processing	80,000 m/c hrs.	60,000 m/c hrs.	140000	875000	6.25	per m/c hr.
Quality control	12,000 inspn.hrs.	8,000 inspn.hrs.	20000	350000	17.5	per Inspn. Hr.
Packaging/Shipping	750 shipments	500 shipments	1250	137500	110	per shipment
				1437500

Workings:       For unit cost of Ohs using ABC
Equipment setup(10*3000)& (15*3000)	30000	45000
Machine processing (80000*6.25)& (60000*6.25)	500000	375000
Quality control(12000*17.5 )&(8000*17.5))	210000	140000
Packaging/Shipping(750*110)& (500*110))	82500	55000
Total OH	822500	615000
Expected Production	100000	60000
OH cost /unit(total OH/Expected production	8.225	10.25
2. Calculation of total unit cost using ABC	8 inch	12 inch
Direct material cost	52.5	79.5
Direct Manufacturing Labour	20	20
OH cost	8.225	10.25
Total unit cost	80.725	109.75
Oh based on Direct labor cost	8 inch	12 inch
Total expected units	100000	60000
D/L cost/unit	20	20
Total D/L cost	2000000	1200000
Total OH	1437500
OH based on D/L cost(1437500/3200000*2000000)	898437.5
(1437500/3200000*1200000)		539062.5
Per unit (OH/no.of units)	8.984	8.984
3.Calculation of total unit cost using D/L cost	8 inch	12 inch
Direct material cost	52.5	79.5
Direct Manufacturing Labour	20	20
OH cost(1437500	8.984	8.984
Total unit cost	81.484	108.484

Answer 1

Comparison of unit cost

Cost Method	8 inch	12 inch
ABC costing	$80.725	$109.75
Traditional coating	$81.484	$108.484

Unit cost of 8 inch Model as ABC costing is less than unit cost of 12 inch model however unit cost of 12 inch model is less than unit cost of 8 inch model.

On comparison, Traditional costing is easier to follow and adopt than ABC costing but result produced by traditional costing are often inaccurate. Results produce by traditional costing can be very significant diverted from ABC costing results implying under costing or over costing and ABC costing on the other hand produce accurate result since it breaks indirect costs against suitable basis of cost driver activity of each product.