Question

Eastern Chemical Company produces three products. The operating results of the current year are: Product A B с Sales Quantity Target Price Actual Price 1,100.00 $ 286.00 $ 287.00 5,500.00 298. 60 256. 60 550.00 203.50 311.00 Difference $ 1.00 (42.00) $ 107.50 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 $548,100. 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 $ 51.00 21.00 $ 72.00 Product B $ 115.40 13.00 $ 128.40 Product C $ 66.00 11.00 $ 77.00 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: Number of setups Weight of direct materials (pounds) Waste and hazardous disposals Quality inspections Utilities (machine hours) Total Product A 3 401 26 31 2, 200 Product B 6 251 46 36 7, 100 Product C 4 351 31 36 1, 100 Total Overhead $ 9, 100 121, 000 275,000 76,000 67,000 $ 548, 100 Required:

Answer 1

1			Product A	Product B	Product C
	Materials		51	115.4	66
	Labor		21	13	11
	Overhead	(Note:1)	114.45	70.85	59.95
	Total cost		186.45	199.25	136.95
	Note:1
	Overhead=Labor*Predetermined overhead rate (PDOH)
	PDOH=Budgeted factory overhead/Budgeted direct labor cost
	Budgeted direct labor cost:
				Product A	Product B	Product C	Total
	Sales quantity		a	1100	5500	550
	Labor		b	21	13	11
	Budgeted direct labor cost		a*b	23100	71500	6050	100650
	PDOH=548100/100650=$ 5.45 per direct labor cost
	Overhead:
			Product A	Product B	Product C
	Labor	a	21	13	11
	PDOH	b	5.45	5.45	5.45
	Overhead	a*b	114.45	70.85	59.95
3	Product cost under ABC:
			Product A	Product B	Product C
	Materials		51	115.4	66
	Labor		21	13	11
	Overhead	(Note:2)	142.67	41.75	293.75
	Total cost		214.67	170.15	370.75

Note:2
Activity rate:
Activity cost pool		Total overhead	Activity Driver					Activity rate
		a					b	a/b
Setup		9100	Number of setups				13	700	Per setup
							(3+6+4)
Direct materials related		121000	Weight of direct materials (pounds)				1003	120.64	Per pound
							(401+251+351)
Waste and hazardous disposals		275000	Waste and hazardous disposals				103	2669.90	Per disposal
							(26+46+31)
Quality inspections		76000	Quality inspections				103	737.86	Per inspection
							(31+36+36)
Utilities		67000	Machine hours				10400	6.44	Per machine hour
							(2200+7100+1100)
Total		548100

a a*b Overhead cost allocated: Product A Activity Overhead Activity Activity rate Driver cost b Setup 700 Per setup 3 2100 Direct materials related 120.64 Per pound 401 48375.87 Waste and hazardous disposals 2669.90 Per disposal 26 69417.48 Quality inspections 737.86 Per inspection 31 22873.79 Utilities 6.44 Per machine hour 2200 14173.08 Total 156940.2 Sales quantity b 1100 Overhead cost per unit (a/b) 142.67 a Overhead cost allocated: Product B Activity Overhead Activity Activity rate Driver cost a b a*b Setup 700 Per setup 6 4200 Direct materials related 120.64 Per pound 251 30280.16 Waste and hazardous disposals 2669.90 Per disposa 46 122815.5 Quality inspections 737.86 Per inspection 36 26563.11 Utilities 6.44 Per machine hour 7100| 45740.38

36 737.86 Per inspection 6.44 Per machine hour 7100 Quality inspections Utilities Total a Sales quantityb Overhead cost per unit (a/b) 26563.11 45740.38 229599.2 5500 41.75 Overhead cost allocated: Product C Activity Overhead Activity Activity rate Driver cost a b a*b Setup 700 Per setup 4 2800 Direct materials related 120.64 Per pound 351 42343.97 Waste and hazardous disposals 2669.90 Per disposal 31 82766.99 Quality inspections 737.86 Per inspection 36 26563.11 Utilities 6.44 Per machine hour 1100 7086.538 Total a 161560.6 Sales quantityb 550 Overhead cost per unit (a/b) 293.75

Comparison: Product A Product B Product C а 214.67 170.15) 370.75 Product costs: Activity system ABC-based product pricing: Target price Actual selling price Difference in price a*150% 322.01 287 255.22 256.6 1.38 556.12 311) -245.12 -35.01