Answer to 1
Analysis of data indicates that the company is using incorrect method of allocating overheads i.e. 400% of direct labour standard to all products. However, each product production process is different and is driven by different usage of activities
Answer to 2 and 3
As per the traditional method, the company is showing higher profit margin of 19% in products C and D. However, in ABC Costing methodology, products C and D are in loss of 48% and 177% , and hence should be discontinued. Detailed workings are as below:
Traditional method
A | B | C | D | Total | |
Sales | 86000 | 52000 | 16000 | 3600 | 157600 |
DM | 28000 | 20000 | 5500 | 400 | 53900 |
DL | 9500 | 5000 | 1500 | 500 | 16500 |
O/H | 38000 | 20000 | 6000 | 2000 | 66000 |
Operating income | 10500 | 7000 | 3000 | 700 | 21200 |
Profit | 12% | 13% | 19% | 19% | 13% |
ABC Method
A | B | C | D | Total | |
Sales | 86000 | 52000 | 16000 | 3600 | 157600 |
DM | 28000 | 20000 | 5500 | 400 | 53900 |
DL | 9500 | 5000 | 1500 | 500 | 16500 |
Overheads | 20,968 | 19,245 | 16,707 | 9,080 | 66000 |
Operating income | 27,532 | 7,755 | (7,707) | (6,380) | 21,200 |
Profit | 32% | 15% | -48% | -177% | 13% |
Calculation of overheads
Calculation of total cost under 4 activities:
Total cost | 30,000 | 12,000 | 10,000 | 7,000 | 4,000 | 3,000 |
Wages and benefits | Benefits and ins | IT | Equipment usage | Maintenance | Utility | |
Process production run | 40% | 40% | 30% | 50% | 25% | |
Setup equipment | 40% | 40% | 25% | |||
Manage products | 20% | 20% | 70% | 25% | ||
Run machines | 100% | 50% | 25% |
30,000 | 12,000 | 10,000 | 7,000 | 4,000 | 3,000 | ||
Wages and benefits | Benefits and ins | IT | Equipment usage | Maintenance | Utility | TOTAL | |
Process production run | 12,000 | 4,800 | 3,000 | - | 2,000 | 750 | 22,550 |
Setup equipment | 12,000 | 4,800 | - | - | - | 750 | 17,550 |
Manage products | 6,000 | 2,400 | 7,000 | - | - | 750 | 16,150 |
Run machines | - | - | - | 7,000 | 2,000 | 750 | 9,750 |
No, of activities in each product:
Sale units | 60000 | 50000 | 10000 | 2000 | 122000 |
Unit selling price | 1.43 | 1.04 | 1.60 | 1.80 | |
Machine hours per unit | 0.1 | 0.1 | 0.1 | 0.1 | |
Machine hours | 6000 | 5000 | 1000 | 200 | 12200 |
Production runs | 50 | 50 | 38 | 12 | 150 |
Set up time (Hours) | 150 | 120 | 200 | 100 | 570 |
Manage products | 1 | 1 | 1 | 1 | 4 |
Calculation of overheads:
A | B | C | D | Total | Basis | |
Overheads | 20,968 | 19,245 | 16,707 | 9,080 | 66000 | |
Process production run | 7,517 | 7,517 | 5,713 | 1,804 | 22550 | Production runs |
Setup equipment | 4,618 | 3,695 | 6,158 | 3,079 | 17550 | Set up time (Hours) |
Manage products | 4,038 | 4,038 | 4,038 | 4,038 | 16150 | Manage products |
Run machines | 4,795 | 3,996 | 799 | 160 | 9750 | Machine hours |
Implementation of Activity-based costing (ABC) The case of a Juice Company John Orland, controller of the...
Implementation of Activity-based costing (ABC) The case of a Juice Company John Orland, controller of the Juice Company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a hefty 20 per cent of profit margin. Recently, Dan Brun, the sales manager has expanded the lines of products to encompass new flavors (C & C) which were in high demand by customers who were willing to pay...
doctor just give this information Implementation of Activity-based costing (ABC) The case of a Juice Company John Orland, controller of the Juice Company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a hefty 20 per cent of profit margin. Recently, Dan Brun, the sales manager has expanded the lines of products to encompass new flavors (C & C) which were in high demand by customers...
. Required Question: . please do it Implementation of Activity-based costing (ABC) The case of a Juice Company John Orland, controller of the Juice Company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a hefty 20 per cent of profit margin. Recently, Dan Brun, the sales manager has expanded the lines of products to encompass new flavors (C & C) which were in high demand...
John Orland, controller of the Juice Company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a hefty 20 per cent of profit margin. Recently, Dan Brun, the sales manager has expanded the lines of products to encompass new flavors (B & C) which were in high demand by customers who were willing to pay 5 to 10 % premium. Richard Dunn, the manufacturing...
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