Question

The following data are for the two products produced by Tadros Company.

The following data are for the two products produced by Tadros Company. Direct materials Direct labor hours Machine hours Batches Volume Engineering modifications Number of customers Market price Product A $15 per unit 0.5 DLH per unit 0.4 MH per unit 200 batches 16,000 units 18 modifications 600 customers $55 per unit Product B $30 per unit 1.5 DLH per unit 1.2 MH per unit 360 batches 3,600 units 82 modifications 500 customers $220 per unit The company's direct labor rate is $27 per direct labor hour (DLH). Additional information follows. Costs Driver Indirect manufacturing Engineering support Electricity Setup costs Nonmanufacturing Customer service $ 53,600 Engineering modifications 42,880 Machine hours 171,520 Batches 93,500 Number of customers

Answer 1

Using Normal absorption Costing

Total Computation of Total Direct Labour Hours and its cost Product A Product B Cost per Hour 27 27 DLH Per Unit 1 2 Cost Per Unit 14 41 Total No.of Units 16,000 3,600 Total Direct Labor Hours 8,000 5,400 13,400 Computation of No.of Units Per Customer Product A Total No.of Units 16,000 Number of Customers 600 Units Per Customer 27 Product B 3,600 500 7 Calculation of Plant wide overhead rate Engineering Support Electricity Setup Costs Total Manufacturing Overhead Direct Labour Hours Plant wide overhead rate 53,600 42,880 1,71,520 2,68,000 13,400 20 Allocation of Overhead Total Direct Labor Hours Plant wide overhead rate Total Overhead Cost Total No.of Units OH Cost per unit Product A 8,000 20 1,60,000 16,000 10 Product B 5,400 20 1,08,000 3,600 30

Total Manufcturing Cost per unit Product Product B Direct Material Cost per Unit 15 30 Direct Labor Cost Per unit 13.5 40.51 OH Cost per unit 10 30 Total Manufacturing Cost per uni 38.5 100.5 Gross Profit Per Unit Market Price Manufacturing Cost Per Unit Gross Profit Per Unit Product A Product B 55 220 38.5 100.5 16.5 119.5 Gross Profit generated by Each Customer Product A Product B Gross Profit Per Unit 16.5 119.5 Units Per Customer 27 7 Gross Profit Per Customer 440 860 Cost of providing customer service to each customer (Blanket Rate) Customer Service Costs 93,500 No.of Customers 1,100 Per Customer 85 Is Gross Profit adequate for each customer Product Product B Gross Profit Per Customer 440.00 860.40 Customer Service Cost per Cust 85 85 355.00 775.40 Is the profit Adequate? Yes Yes

Using ABC

Computation of total units of Cost Drivers Cost Driver Product A Product B Engineering Modifications 18 Machine Hours 6400 Batches 200 Total 82 4320 360 100 10,720 560 Allocation of Cost per unit of Cost Driver Cost Head Amount (A) Cost Driver Engineering Support 53,600 Engineering Modifications Electricity 42,880 Machine Hours Setup Costs 1,71,520 Batches Total units of Cost Drive Amount Per Unit of Cost Driver (A/B) 100 536 10,720 4 560 306

43,952 17,280 Allocation of Manufacturing Overhead Cost Head Product A Product B Engineering Support 9,648 (18'536) (82'536) Electricity 25,600 (6,400'4) (4,320*4) Setup Costs 61,257 (200-306) (360"306) Total Manufacturing Overh 96,505 No. of Units 16,000 Manufacturing Overhead Per Uni 6.03 1,10,263 1,71,495 3,600 47.64 Product B Total Manufaturing Cost per unit Product A Direct Material Cost per Unit 15 Direct Labor Cost Per unit 13.5 OH Cost per unit 6.03 Total Manufacturing Cost pl 34.53 30 40.5 47.64 118.14 Gross Profit Per Unit Market Price Manufacturing Cost Per Unit Gross Profit Per Unit Product A Product B B 55 34.53 20.47 2201 118.14 101.86 Gross Profit generated by Each Customer Product A Product B Gross Profit Per Unit 20.47 Units Per Customer 27 Gross Profit Per Customer 546 101.86 7 733

I have highlighted the portions where you have went wrong. Mainly while calculating the direct labor cost. You have considered the direct labor hours for calculating the manufacturing costs instead of multiplying it with the rate per hour. Other than that everything is alright.However, I have prepared the entire solution again for your easy reference.

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