Question

Problem 17-1A Comparing costs using ABC with the plantwide overhead rate LO P1, P3, A1, A2 The following data are for the two products produced by Tadros Company Direct materials Direct labor hours Machine hours Batches Volume Engineering modifications Number of customers Market price Product A $14 per unit 8.6 DLH per unit 0.5 MH per unit 120 batches 10,000 units 10 modifications 500 customers $36 per unit Product B $28 per unit 1.5 DLH per unit 1.1 MH per unit 240 batches 2,000 units 50 modifications 400 customers $95 per unit per unit The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows. Costs Driver Indirect manufacturing Engineering support Electricity Setup costs Nonmanufacturing Customer service $25,000 Engineering modifications 28,800 Machine hours 42,000 Batches 71,000 Number of customers Required: (Round your per unit cost answers to 2 decimal places and other answers to nearest whole number. Loss amounts should be indicated with minus sign.)

Answer 1

1. Computation of manufacturing Cost per unit using plant wide overhead rate based on direct labor hours Engineering support Cost 25,000 Electricity 28,800 Setup costs 42,000 Total indirect manufacturing Cost 95,800 Direct labor hours Units Produced DLH per unit c Total DLH d = b*c Product A Product B Total Direct labor hours 10000 2000 0.6 1.5 6000 3000 9000 Plant wide overhead rate Total Overhead Cost Direct labor hours 95800 9000 $10.64 per DLH Overhead Assigned Total Overhead Cost Units Produced OH Cost per Unit Activity Driver Direct labor hours Plantwide OH Rate per direct labor hour d=bc Product A Product B 6000 3000 $10.64 $10.64 $63,866.67 $31,933.33 10000 2000 f=d/e $6.39 $15.97 Direct labor Hour (DLH) Rate $20 Product A Product B Direct Material Cost per unit Direct labor Cost per unit (DLH per unit * DLH rate) Overhead Cost per unit Manufacturing Cost per unit 14.00 $ 12.00 $ 6.39 $ 32.39 $ 28.00 30.00 15.97 73.97 S 1.2 Computation of Gross Profit Per unit Product A Product B Market Price per unit Manufacturing Cost per unit Gross Profit Per unit 36.00 $ (32.39) $ 3.61 $ 95.00 (73.97) 21.03

2.1 Computation of Gross Profit Per Customer Product A Product B Total 2000 Volume (units) No. of Customers 10000 500 12000 900 400 Product A Gross Profit Per unit Units Purchased per customer (Volume/No. of Customers) Gross Profit Per Customer (a*b) $3.61 20.00 $72.27 Product B $21.03 5.00 $105.17 2.2 Computation of Cost of providing Customer Service to each Customer a. Customer Service Cost b. Number of Customers c. Customer Service Cost per Customer (a/b) $71,000 900 $78.89 Adequacy of Gross profit for each Customer using plant wide overhead rate Product A a. Gross Profit Per Customer b. Customer Service Cost per Customer Profit per customer (a-b) Is the profit adequate ? $72.27 $78.89 -$6.62 Product B $105.17 $78.89 $26.28 Yes - Ne No 3.1. Determination of manufacturing Cost per unit of each product line using ABC Product A Product B a Volume (units) b Machine hours per unit c Total machine hours (a*b) 10000 0.5 5000 2000 1.1 2200

A. Computation of Cost per driver :- Activities Estimated Overhead Cost Activity measures (Cost Drivers) Expected Activity Product B Cost per driver Product Total Engineering support CostS Electricity Setup costs Total Manufacturing Overhead Cost 25,000 Engineering Modifications 28,800 Machine Hours 42,000 Batches 10 5,000 120 50 2,200 240 60 7,200 B = c/f $ 416.67 S 4.00 $116.67 95,800 B. Computation of Overhead Cost Per unit:- Total Overhead Assigned Activity Driver Cost per driver Overhea d Cost d = Exc Product A Engineering support Cost Electricity Setup costs 10 Engineering Modifications 5,000 Machine Hours 120 Batches $ 416.67 $ 4,167 $ 4.00 $ 20,000 116.67 $ 14,000 Total $ 38,167 Units Produced 10,000 Overhead Cost per Unit $ 3.82 Product B S Engineering support Cost Electricity Setup costs 50 2,200 240 Engineering Modifications Machine Hours Batches 4 16.67 $ 4.00 116.67 Total Units Produced Overhead Cost per Unit $ 20,834 $ 8,800 $ 28,001 $ 57,634 2,000 $28.82 Product A Product B Direct Material Cost per unit Direct labor Cost per unit Overhead Cost per unit Total Manufacturing Cost per unit 14.00 $ 12.00 $ 3.82S 29.82 $ 28.00 30.00 28 82 86.82 s 3.2 Computation of Gross Profit Per unit Product A Product B Market Price per unit Manufacturing Cost per unit Gross Profit Per unit S $ $ 36.00 $ (29.82) $ 6.18 $ 95.00 (86.82) 8.18 4.1 Computation of Gross Profit Per Customer Product A Product B $8.18 b. Gross Profit Per unit Units Purchased per customer (Volume/No. of Customers) Gross Profit Per Customer (a*b) $6.18 20 $123.67 $40.91 4.2 Adequacy of Gross profit for each Customer using ABC Product A a. Gross Profit Per Customer b. Customer Service Cost per Customer c. Profit (loss) per customer (a-b) Is the profit adequate ? $123.67 $78.89 $44.78 Product B $40.91 $78.89 -$37.97 No Yes 5. Activity based costing method gives better information to managers of the company. Ans Activity based costing method

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