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.

	Product A			Product B
Direct materials	$	20 per unit		$	25 per unit
Direct labor hours		0.5 DLH per unit			1.5 DLH per unit
Machine hours		0.4 MH per unit			1.2 MH per unit
Batches		200 batches			360 batches
Volume		16,000 units			3,600 units
Engineering modifications		18 modifications			82 modifications
Number of customers		500 customers			400 customers
Market price	$	55 per unit		$	220 per unit

The company's direct labor rate is $32 per direct labor hour (DLH). Additional information follows.

	Costs			Driver
Indirect manufacturing
Engineering support	$	53,600		Engineering modifications
Electricity		42,880		Machine hours
Setup costs		171,520		Batches
Nonmanufacturing
Customer service		85,500		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.)

1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct labor hours.

1.2 What is the gross profit per unit?

2.1 How much gross profit is generated by each customer of Product A and Product B using the plantwide overhead rate?

2.2 What is the cost of providing customer service to each customer?

Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate?

3.1 Determine the manufacturing cost per unit of each product line using ABC.

3.2 What is the gross profit per unit?

4.1 How much gross profit is generated by each customer of Product A and Product B using ABC?

4.2 Is the gross profit adequate for each customer of Product A and B using ABC?

5. Which method of product costing gives better information to managers of this company?

Answer 1

Tadros Company Requirement 1 Plantwide Overhead rate = Overhead costs / Direct labor hours = 268000 / 13400 = 20 per DLH Activity Plantwide Total Units Ohd. Cost Overhead Assigned Driver OH rate Ohd. Cost Produced per unit Product A 8000 20 160000 16000 10 Product B 5400 20 108000 3600 30 Product A Product B 20 25 Total manufacturing cost per unit: Direct material cost per unit Direct labor cost per unit Overhead cost per unit Total manufacturing cost 16 48 10 30 46 103 Gross Profit per unit Product A Product B 55 220 Market price Manufacturing cost per unit Gross profit per unit -46 -103 117 9 Requirement 2 Gross profit per unit Units purchased per customer Gross profit per customer Product A Product B 9 117 32 9 288 1053 cost of providing customer service to each customer = = Customer service costs / Number of customers = 85500 / 900 = 95 per customer

Gross profit adequate for each customer of Product A and B using the plantwide overhead rate Gross profit per customer Customer service cost percustomer Profit (loss) per customer Is the profit adequate? Product A Product B 288 1053 95 95 193.00 958.00 Yes Yes Requirement 3 Manufacturing cost per unit of each product line using ABC. Overhead costs / Number ofmodifications = 53600 / 100 = 536 per modification Electricity Overhead costs / Number of Machine Hours = 42880 / 10720 = 4 per machine hour Setup Overhead costs / Number ofBatches = 171520 / 560 = 306 Batches

Total Ohd. Cost Activity Driver Activity Driver 536 Overhead Assigned Product A Engineering support 18 Electricity 6400 Setup 200 Total overhead costs assigned Total units produced Overhead cost per unit modifications machine hours batches 4 306 per modifications per machine hours per batch 9648 25600 61200 96448 16000 6.03 82 536 43952 4320 Product B Engineering support Electricity Setup Total overhead costs assigned Total units produced Overhead cost per unit modifications machine hours batches 4 per modifications per machine hours per batch 17280 110160 360 306 171392 3600 47.61 Product A 20 Product B 25 Total manufacturing costs Direct material cost per unit Direct labor cost per unit Overhead cost per unit Total manufacturing cost 16 48 6.03 47.61 42.03 120.61 Product A Product B 220 55 Market price Manufacturing cost per unit Gross profit(loss) per unit - 120.61 -42.03 12.97 99.39 Gross profit is generated by each customer of Product A and Product B using ABC? Pro ct A 12.97 Product B 99.39 Gross profit(loss) per unit Units purchased per customer Gross profit per customer 32 9 415.10 894.52 gross profit adequate for each customer of Product A and B using ABC? Product A 415.10 95 Product B 894.52 95 Gross profit per customer Customer service cost percustom Profit (loss) per customer Is the profit adequate? 320.10 799.52 Yes Yes