Question

Traditional costing system allocate overhead based on a standard unit-based measure that ll products have in common machine hours, processing time or direct labor hours but these allocation measures assume all overhead cost are directly related to units produced. Company uses a standard allocation method for overhead of 400% of direct labor costs. to produce 100000 units of product A requires $35000 of direct material and $80000 of direct labor costs.
To produce 3000 units of product B requires $12000 in direct materials and $3750 in direct labor costs. Product A sells for $8 per unit and product B for $14 per unit.

The implementation of an ABC system requires an organization to change its way of analyzing the costing of a product. The people involved must change their focus to what specific overhead activities are involved int he production of the product and the costs of the these activities.
ABC links all the costs of activities like order processing, setup, material handling to a product, based on the consumption of that resource by the product.

The activity centers chosen by the team and their associated annual costs were

Activity Per activity
Quality $800000
Prod Scheduling $25000
Set-up $800000
Shipping $400000
Shipping Admin $150000
Production $1200000

The cost drivers and their total qantity for each activity center were.

No of Shipment received- Shipping Admin       1000
No of Machine Hours - Production 15000
No of Containers shipped - Shipping 50000
No of setup - Prod scheduling & setup 500
No of pieces scrapped - Quality 8000

The accounting department and Production management of Company analysis the activities for a one year period of all the company

Product A cost       Product B Cost
Cost Driver Driver Consumption   Driver Consumption

No of pieces scrapped 600           200
No of setup 10           12
No of containers shipped 500           18
No of Shipments received 100           24
No of machine hours 600           25

Requirements

1. Prepare a schedule calculating the units cost an grass margin o Product A and B. Using company traditional costing system.
2. Prepare a schedule calculating the unit cost of Product A and B using an activity based costing approach.

3. If company were able to win the bid for Product A, another 100000 units, discuss how this would affect the unit cost of Product A. Assume that no new production equipments is required. Assume the number of containers shipped and machine hours used will increase proportionally with the added production. In Addition, the number of pieces scrapped, Setup - Ups and the number of shipments received will increase by 50%.

Answer 1

Answer with working is given below

Total manufacturing cost per unit- Traditional Costing Product A Product B Direct Material $35,000 $12,000 Direct Labor $80,000 $3,750 Total Overhead allocated $320,000 $15,000 400% of Direct labor cost Total manufacturing cost $435,000 $30,750 Total output 100,000 3,000 Manufacturing unit cost $4.35 $10.25 Gross Margin Selling price Manufacturing unit cost Gross Margin per unit Product A $8.00 $4.35 $3.65 Product B $14.00 $10.25 $3.75 Calculation of Activity rates Activity Activity rate Quality Production scheduling Set up Shipping Shipping Admin Production Total budgeted indirect costs Total Overheads $800,000 $25,000 $800,000 $400,000 $150,000 $1,200,000 $3,375,000 Total Activities 8,000 500 500 50,000 1,000 15,000 $100.00 Per piece scrapped $50.00 Per set up $1,600.00 Per set up $8.00 per container shipped $150.00 per shipment received $80.00 per machine hour Cost activity rate Activities used Allocated Cost Activity Product A 600 Product B 200 Quality Production scheduling Set up Shipping Shipping Admin Production Total Overheads $100.00 $50.00 $1,600.00 $8.00 $150.00 $80.00 Product $60,000 $500 $16,000 $4,000 $15,000 $48,000 $143,500 100,000 $1.44 Product B $20,000 $600 $19,200 $144 $3,600 $2,000 $45,544 A 3,000 B $15.18 A/B Total Volume Overhead cost per unit Total manufacturing cost per unit- ABC method Product A Direct Material $35,000 Direct Labor $80,000 Total Overhead allocated $143,500 Total manufacturing cost $258,500 Total output 100,000 Manufacturing unit cost $2.59 Product B $12,000 $3,750 $45,544 As per above working $61,294 3,000 $20.43 Product A $8.00 Gross Margin Selling price Manufacturing unit cost Gross Margin(Loss) per unit Product B $14.00 $20.43 -$6.43 $2.59 $5.42) Product Cost for bid Direct Material Direct Labor Total Overhead allocated Total manufacturing cost Total output Manufacturing unit cost Product A $35,000 $80,000 $97,750 As per working below $212,750 100,000 $2.13 Cost per unit will below than earlier cost due to certain activities not increasing in proportion to production Allocation of Overhead Activity Activities 300 Quality Production scheduling Set up Shipping Shipping Admin Production Total Overhead Cost activity rate $100.00 $50.00 $1,600.00 $8.00 $150.00 $80.00 Total Cost $30,000 $250 $8,000 $4,000 $7,500 $48,000 $97,750 For Bid | Existing 600 Calculation of activities for Product A Quality Increase by 50% Production scheduling Increase by 50% Set up Increase by 50% Shipping proportionately Shipping Admin Increase by 50% Production proportionately 500 100 600