Question

Eastern Chemical Company produces three products. The operating results of the current year are: Product А Sales Quantity 1,800.00 9,000.00 900.00 Target Price $300.00 312.60 217.50 Actual Price $301.00 270.60 325.00 Difference $ 1.00 142.00) $107.50 с The firm sets the target price of each product at 150% of the product's total manufacturing cost. It appears that the firm was able to sell Product Cat a much higher price than the target price of the product and lost money on Product B. Tom Watson, CEO, wants to promote Product C much more aggressively and phase out Product B. He believes that the information suggests that Product C has the greatest potential among the firm's three products because the actual selling price of Product C was almost 50% higher than the target price, while the firm was forced to sell Product B at a price below the target price. Both the budgeted and actual factory overhead for the current year are $827,400. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are: Direct materials Direct labor Total prime cost Product A $ 65.00 35.00 $100.00 Product B $129.40 27.00 $156.40 Product C $ 80.00 18.00 $ 98.00 The controller noticed that not all products consumed factory overhead similarly. Upon further investigation, she identified the following usage of factory overhead during the year: 265 Number of setups Weight of direct materials (pounds) Waste and hazardous disposals Quality inspections Utilities (machine hours) Total Product A Product Product C 2 5 3 415 365 40 60 45 45 50 50 3,600 8,500 1,800 Total Overhead $ 8,400 198,000 450,000 90,000 91,000 $827,400

Answer 1

-1). Ausa Manufacturing cost per Unit for each of the Products using the volume - based method. Product c Materials Product A Product B $ 139.40 $ 80 Labor $ 35 $ 27 $18 Overhead $89.88 $69.34 $ 46.22 [(33)x(sq) ((21x2583 (18)x(259).) Total cost $189.88 $225.16 $144.22 Explanation Predetermined Overhead rati & factory Overhead Total direct labor Cost - $ 827,400 $ 322,200 *100 To Predetermined Overhead rate = 256:80% they are of Direct labor Total Direct labor (35x 1,800) + (7x9,000) +(18x900) Cost 63,000_t 243,000 + 16,200 $ 322,200 Total Direct labor Cost

2 Ans Leapt Profitable and the most profitable Product under both the current and the ABC systems. ?, Cwveen't Cost Data ABC costing system Most Profitable Product Product c c Product B least profitable Product Product B Product c. Explanation i Least Profitable and the most profitable Product. Total Overhead Activity Amounts Activity Rok Number of $_8,400 10 setups $840_penet Setups. (2+3+32 setups. (8,400:10 Weight of 198,000 1045 Pounds $189.47 per Direct Material (415+265+365) Pound 450,000 145 disposals $310.3.45 per 40+60+45) disposal Wlaste and hazardous disposals = Quality Inspections 90,000 145 inspectione $ 620.69 (45 450+50) Per Puspection. e Utilities 81.000 13,900 machine how (3,600 + 8,50071,800) $ 5.83 per machine hows

Allocated to A Overhead cost Allocated B $4, 200 Toverhead cost Allocated to co $2,520 Number of $840 per Setups cost allocated to products under ABC Activity Rate Overhead Coast $ 4,680 Setups (840x2) (840x5) 7 (840x3) Weight of $189.47 $ 78,630.05 $ 50,209.55 $ 69,156.55 Direct Material per pounds ($189.47X415) ($189.41X263) ($189.47x365 Wlaste and $3,103.45 $184,138 $186,207 $139,655.25 hazardous peý chisposaly ($3,103.45X40)$&103.45X 60) $13,103.45 x 45 disposals Quality $620.69 $27,93].05 $ 3,1934.50_$ 31,034.50 inspections per inspections ($620.69 x 45 $620.69x50 5620.69x50) A $ 10,494 Utilities $ 5.83 $ 20988 $49,555 (Machine per Maching $5.833,600) ($5.838 8,500 ($5.83X1,800) hows) howrs Total $ 253,36710 $32),206.05 $ 252.860.30

Overhead costs Allocated to each product using ABC: Product A Product B Products Total $ 253,367.10 $ 321,206.05. $252,860.30 Overhead Costs Sales Quantity 1,800 9,000 goo Overhead ti Cost Pey $140.76 Per Unit $253,367,10 1,800 $35.69 Peu unit $321,206.05 9,000 $280.96 Pelle $ 252,860.30 goo Unit Ne Manufacturing Cost Per Unit using ABC : tubos Product A Product B Products Direct Materials on $ 650 $129.40 $ 80 Direct labor 35 01 27 18 140.16 35,69 280.96 Manufacturing Overhead Total cost $240.76 $192.09 $378.96

Product A $ 301 (189.8%) Product B $ 270.60 -(225.74) Producte $325 (1442237 Actual Price Less Total cost uring based method. (Note % See Q. 1.) Most Profitable Volume $112 $44.86 $180.78 Mence Most Profitable Product under volume -based method or current - System is producto ! $180.78 while the least Profitable Product ú Product B of $44.86. buhart Product A Actual Price $ 301 Product B $ 270.60 Product c с $325 tesso. Total cost (Note:Q.2 see) 240.76 ) (192.09) 378.96) Profit loss $60.24 $78.5 $ 53.96 Hence Most Profitable Product under ABC System is Product B of $78.51 While the least Profitable is Product Negative Amount - $53.96. c of

Product C $378.96 • 3 3) . New Target Price Product Product B Product costs Activity System $240.76 $_192.09 ABC-based Product Pricing, $361.14 $ 288.14 $568.44 [$240.76X1503) ($192.09X1507 $378.96 X 150% less: Actual Price (301) 270.60) (325) Target Price $ 60.14 $ 14.54 Difference in Price $243.44

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