You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic” and the “Superjet” which promises a jet power setting that “borders on cruel”. Since the introduction of the Superjet, the company’s profits have been faltering, despite increased sales. The company’s senior accountant believes that the costing system may be causing problems. The company uses direct-labour hours as the basis for applying overhead. Overhead is estimated to be $300,000.
The following cost data is known:
Basic |
Superjet |
|
Direct Materials |
$700 |
$1200 |
Direct Labour ($15 per hour) |
60 |
90 |
Number of units produced |
600 units |
100 units |
The CFO wishes to explore an activity-based costing system
Activity (Cost Driver) |
Estimated MOH |
Expected Activity |
||||
Total |
Basic |
Superjet |
||||
Assembly (Labour Hours) |
$60,000 |
3,000 |
2,400 |
600 |
||
Quality control (Inspection Hours) |
75,000 |
800 |
600 |
200 |
||
Machining (Machine Hours) |
25,000 |
40,000 |
30,000 |
10,000 |
||
Parts Admin (Number of Parts) |
140,000 |
500 |
100 |
400 |
||
$300,000 |
||||||
Required - Provide detailed solutions/ answers to the following:
i) Predetermined overhead rate = $300000 / 3000 = $100 per labor hour
ii) Labor hours per unit
Basic = $60 / 15 = 4
Superjet = $90 / 15 = 6
Basic | Superjet | |
Direct Materials | $ 700 | $ 1,200 |
Direct Labor | $ 60 | $ 90 |
Overhead cost | $ 400 | $ 600 |
Unit cost | $ 1,160 | $ 1,890 |
iii)
Activity | Cost | Cost Driver | Cost per Cost driver | ||
Assembly | $ 60,000 | 3000 | Direct labor hours | $ 20.00 | per labor hour |
Quality Control | $ 75,000 | 800 | Inspection hours | $ 93.75 | per inspection hour |
Machining | $ 25,000 | 40000 | Machine hours | $ 0.63 | per machine hour |
Parts Admin | $ 140,000 | 500 | Parts | $ 280.00 | per part |
Total | $ 300,000 |
iv)
Basic | Superjet | |
Direct Material | $ 420,000 | $ 120,000 |
Direct Labor | $ 36,000 | $ 9,000 |
Overhead allocated | ||
Assembly | $ 48,000 | $ 12,000 |
Quality Control | $ 56,250 | $ 18,750 |
Machining | $ 18,750 | $ 6,250 |
Parts Admin | $ 28,000 | $ 112,000 |
Total Overhead | $ 151,000 | $ 149,000 |
Total Product Cost | $ 607,000 | $ 278,000 |
Units Produced | 600 | 100 |
Product Cost per unit | $ 1,011.67 | $ 2,780.00 |
As per ABC Costing, product cost per unit for Superjet varies hugely as more overheads are allocated to Superjet compared to traditional costing. Whereas product cost per unit for Basic is lower in ABC
ABC is not used widely, because it is more time consuming, more complex to calculate, difficult to separate costs under different heads and identify their cost drivers
You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic”...
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