Question

Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit product costs. Activity Cost Driver Cost Assembly DL hours logged $500 Machining Machine hours logged $1,500 Setting Up Equipment Number of setups $1,200 Product Movement Number of Moves $800

Answer 1

Answer:

1 Per Unit Cost of Acoustic Line Under Traditional Method $4,000 100 Total Overheads Direct Labour Hours (20*1+100*0.8) Overhead rate (Total Overhead/Labour Hours) $40 per labour hour Total Cost per unit Direct Material Direct Labour ( 1*$25) Overhead (1*$40) per unit cost $60 $25 $40 $125

2 Per Unit Cost of Electric Line Under Activity Based Costing Activity Assembly Machining Setting up Product Movement Cost Driver Cost Cost Driver DL hours logged $500 100 labour hours Machine hours logged $1,500 50 machine hours Number of setups $1,200 8 setups Number of moves $800 5 movements Cost Driver Rate $5 $30 $150 $160 $70 $20 Total Cost per unit Direct Material Direct Labour ($25*0.8) Manufacturing Overhead Assembly ($5*0.8) Machining ($30*0.4) Setting up ($150/25) Product Movement ($160/25) $4 $12 $6 $6.40 $118.40 $118 Rounded off to

3 Each product is over/undercosted by $360 No. of units Acoustic Electric Cost as per ABC Cost as per Traditional $143 $125 $118.40 $122 Excess/Short $18 ($3.60) Total Excess/Short 20 $360 100 ($360)