Question

CORRECTED: ABC ORIGINAL PROBLEM DATA (18I Excel File: CHECK FIGURES: AX40 Traditional Unit Cost: $62.75 EX90 ABC Unit Cost: $116.80 For several years, Adria Manufacturing has produced a single product called AX40. Then two years ago, the company automated a portion of its plant and at the same time introduced a second product called EX90 which has become increasingly popular. The EX90 is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The AX40 requires only 0.75 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor hours. Despite the growing popularity of the company's EX90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company's costing system. Material and labor costs per unit are as follows: AX40 S35 EX90 S48 Direct materials Direct labor (0.75 hour and 1.0 hour a $12 per hour) S9 S12 Management estimates that the company will incur $1,000,000 in manufacturing overhead costs during the current year and 40,000 units of the AX40 and 10,000 units of the EX90 will be produced and sold REQUIRED: Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead costs on the basis of direct labor hours Using this rate and other data from the problem (Direct materials and labor cost). determine the unit product costs of each product D'Focus E I

Answer 1

From the information given above, I have computed Manufacturing overhead rate for each product and unit product cost using traditional method and ABC.

Adria Manufacturing AX40 EX90 3 30000 10000 AX40 40000 4 5 $35 General Data Annual sales in units Direct Material per unit Direct labor cost per unit $12 per hour Direct labor hours per unit EX90 10000 $48 12 (1*12) 1 hour 1. Traditional Pre determined Overhead rate Estimated total manufacturing overhead 1000000 Estimated total allocation base(DLH) 40000 POHR per DLH 25 (1000000/40000) Note: Total direct labor hours AX40 40000units*0.75 hour 30000 EX40 10000 units 1 hour 10000 Total direct labor hours 40000 Manufacturing Overhead Applied Traditional) 8 (0.75*12) 0.75 hours Units produced Manufacturing Overhead Applied per unit Traditional) 750000 250000 (30000*25) (10000*25) 40000 10000 18.75 25 (750000/ (250000/ 40000) 10000) Unit Product Costs/Traditional) Direct Material Direct labor cost $12 per hour Manufacturing overhead Traditional Unit Product Costs AX40 EX90 3548 9 12 (0.75*12) (112) 18.75 25 62.75 85

2.Activity Based costing Pre determined Overhead rate Estimated Activities & Activity measures overhead Expected Activity cost AX40 EX90 Maintaining parts inventory(number of parts types) || 180000 75 150 Total 225 90000 800 1000 90 Processing purchase orders(number of purchase orders) Quality control number of tests run) 230000 | 2500 3250 5750 Activity Applied Overhead ABC) rates AX40 EX90 800 60000 120000 (180000/225) (75*800) (150*800) 72000 18000 (90000/1000) (800*90) (200*90) 40 100000 130000 (230000/5750) (2500*40) (3250*40) 200000 300000 (500000/10000) (4000*50) (6000*50) 432000568000 40000 10000 10.8 56.8 (432000/ (568000/ 40000) 10000) Machine related machine hours) 500000 4000 6000 10000 50 13 15 Manufacturing Overhead Applied ABC) Units produced Manufacturing Overhead Applied per unit( ABC) 17 18 AX40 35 9 Unit Product Costs(ABC) Direct Material Direct labor cost $12 per hour Manufacturing overhead ABC Unit Product Costs EX90 48 12 (1812) 56.8 116.8 (0.75*12) 10.8 54.8

By using te information, Sales percentage is more for AX40 than EX90 and the Manufacturing overhead activities consumption percentage is more for EX90 than Ax40. Foduct Question 3 Determine what percentage of total sales is related to each product Sales in units Percentage AX40 40000 | 80 (40000/50000) EX90 10000 20 (10000/50000) total sales 50000 100 Determine what percentage of total part types is related to each product Part types Percentage 75 33.33 (75/225) EX90 150 | 56.67 (150/225) total sales 225 100 AX40 Determine what percentage of total tests is related to each product Part types Percentage AX401 2500 43.48 (2500/5750) EX90 3250 56.52 (3250/5750) total sales 5750 100 Determine what percentage of total machine hours is related to each product Part types Percentage AX40 4000 40.00 114000/10000) EX90 6000 50.00 16000/10000) total sales 10000 100