Question

Gigabyte, Inc. manufactures three products for the computer industry:

Gismos (product G): annual sales, 8,000 units

Thingamajigs (product T ): annual sales, 15,000 units

Whatchamacallits (product W ): annual sales, 4,000 units

The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:

	Product G			Product T			Product W
Raw material	$	35.00		$	52.50		$	17.50
Direct labor		16.00	(.8 hr. at $20)		12.00	(.6 hr. at $20)		8.00	(4 hr. at $20)
Manufacturing overhead*		140.00			105.00			70.00
Total product cost	$	191.00		$	169.50		$	95.50

*Calculation of predetermined overhead rate:

Manufacturing overhead budget:
Machine setup	$	5,250
Machinery		1,225,000
Inspection		525,000
Material handling		875,000
Engineering		344,750
Total	$	2,975,000

Direct-labor budget (based on budgeted annual sales):

Product G:	8,000	×		$	16.00		=	$	128,000
Product T:	15,000	×		$	12.00		=		180,000
Product W:	4,000	×		$	8.00		=		32,000
Total								$	340,000

Predetermined overhead rate =	Budgeted overhead	= 875%
	Budgeted direct labor

Gigabyte’s pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following:

	Product G			Product T			Product W
Product cost	$	191.00		$	169.50		$	95.50
Target price		286.50			254.25			143.25
Actual current selling price		213.00			254.25			200.00

Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte, Inc. has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabyte’s competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself.

Required:

Activity Cost Pool	Cost Driver	Product G			Product T			Product W
Machine setup	Number of setups		20	%		30	%		50	%
Machinery	Machine hours		25	%		50	%		25	%
Inspection	Number of inspections		15	%		45	%		40	%
Material handling	Raw-material costs		25	%		69	%		6	%
Engineering	Number of change orders		35	%		10	%		55	%

5. Develop product costs for the three products on the basis of an activity-based costing system.

6. Based on your answers in the above requirement, calculate a target price for each product, using Gigabyte’s pricing formula.

Required 1 Required 2 Required 4 Required 5 Required 6 Develop product costs for the three products on the basis of an activity-based costing system. (Round intern answers to 2 decimal places.) Product Product Product W Direct material Direct labor Machine setupſ Machinery Inspection Material handling Engineering Total $ 0.00 $ 0.00 $ 0.00 < Required 4 Required 6 >

Answer 1

Answer is given below with working notes

5 Product Cost-Based on Activity Based Costing Product Direct Material $35.00 Direct Labor $16.00 Machine setup $0.13 Machinery $38.28 Inspection $9.84 Material handling $27.34 Engineering $15.08 Product Unit cost $141.68 $0.11 Product Product W $52.50 $17.50 $12.00 $8.00 $0.66 $40.83 $76.56 $15.75 $52.50 $40.25 $13.13 $2.30 $47.40 $163.74 $215.75 6 Target price Total Product unit cost Target price 150% of Full product cost Product $141.68 $212.52 Product Product W $163.74 $215.75 $245.61 $323.62 Working notes: Activity cost pool Machine setup Machinery Inspection Material handling Engineering Cost allocation % Product Product Product W 20% 30% 50% 25% 50% 15% 45% 40% 25% 69% 35% 55% 25% 6% 10% Activity cost pool Machine setup Machinery Inspection Material handling Engineering Total Overheads Product $1,050 $306,250 $78,750 $218,750 $120,663 $725,463 Product $1,575 $612,500 $236,250 $603,750 $34,475 $1,488,550 Product W $2,625 $306,250 $210,000 $52,500 $189,613 $760,988) Total $5,250 $1,225,000 $525,000 $875,000 $344,750 $2,975,000 Sales volume 8,000 15,000 4,000 Product $0.13 $38.28 Cost per unit - Cost/ Sales volume Activity cost pod Machine setup Machinery Inspection Material handling Engineering Total Overheads $9.84 Product Product W $0.11 $0.66 $40.83 $76.56 $15.75 $52.50 $40.25 $13.13 $2.30 $47.40 $99.24 $190.25 $27.34 $15.08 $90.68