Question

PROBLEM 4 (12%) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply: BRASS CHROME WHITE Projected sales in units 30,000 50,000 40,000 PER UNIT data: Selling price $40 $20 $30 Direct materials $8 $4 $8- Direct labor $15 $3 $9- Overhead cost based on direct labor hours (traditional system) $12 $3 $ 9 Hours per 1000-unit batch:- Direct labor hours 40 10 30- Machine hours 25 25 10 Setup hours 1.0 0.5 1.0 Inspection hours 30 20 20 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Activity levels Direct labor hours 2,900 hours Machine hours 2,400 hours Setups $465,500 95 setup hours Inspections $405.000 2,700 inspection hours $870,500 Required: a. Using the traditional system, determine the operating profit per unit for each style of faucet. b. Determine the activity-cost-driver rate for setup costs and inspection costs. c. Using the ABC system, for each style of faucet- 1. compute the estimated overhead costs per unit.- 2. compute the estimated operating profit per unit. d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

Answer 1

a) Operating profit per unit: /unit Selling price Direct material Direct Labour Overhead Operating profit per unit: $ $ $ $ $ BRASS CHROME WHITE /unit /unit /unit 40.00 $ 20.00 $ 30.00 8.00 $ 4.00 $ 8.00 15.00 $ 3.00 $ 9.00 12.00 $ 3.00 $ 9.00 5.00 $ 10.00 $ 4.00 b) Based On Activity Based costing Overhead cost pool OH COST Setups $465500 Inspection $405000 Total OH Cost $870500 Cost drivers Setups Hours Machine Hours Activity level Allocation rate 95 $4900 2700 $150 TOTAL Overhead cost pool Setups 95 BRASS 30 (1*30) 900 (30*30) CHROME 25 (0.5*50) 1000 (20*50) WHITE 40 (1*40) 800 (20*40) Inspection 2700 BRASS CHROME WHITE TOTAL Product cost as per ABC MOH- Setup Cost Inspection Cost Total OH Cost 465500 $ $ $ 1,47,000 $ 1,35,000 $ 2,82,000 $ 1,22,500 $ 1,50,000 $ 2,72,500 $ 1,96,000 1,20,000 3,16,000 405000

c) 1. BRASS FAUCETS: Overhead Costs per unit: MOH- Setup Cost Inspection Cost Total OH Cost UNITS PRODUCES Overhead unit cost $ $ $ 1,47,000 1,35,000 2,82,000 30000 9.40 $ Operating profit per unit: /unit Selling price Direct material Direct Labour Overhead Operating profit per unit: $ $ $ $ BRASS /unit 40.00 8.00 15.00 9.40 7.60 $

2. CHROME FAUCETS: Overhead Costs per unit: MOH- Setup Cost Inspection Cost Total OH Cost UNITS PRODUCES Overhead unit cost $ 1,22,500 $ 1,50,000 $ 2,72,500 50000 $ 5.45 Operating profit per unit: BRASS /unit 20.00 4.00 /unit Selling price Direct material Direct Labour Overhead Operating profit per unit: $ $ $ $ $ 3.00 5.45 7.55

3. WHITE FAUCETS Overhead Costs per unit: MOH- Setup Cost Inspection Cost Total OH Cost UNITS PRODUCES Overhead unit cost $ $ $ 1,96,000 1,20,000 3,16,000 40000 7.90 $ Operating profit per unit: /unit Selling price Direct material Direct Labour Overhead Operating profit per unit: $ $ $ $ $ BRASS /unit 30.00 8.00 9.00 7.90 5.10

- Under Traditional cost system the costs of designing products were spread across all products without regard to whether they actually required design work. - Under Traditional cost system, Only manufacturing costs are assigned to products as well as manufacturing costs. - Under traditional system uses Direct Labor Hours, Machine Hours - Under ABC System, These costs are assigned only to products that actually requires design work. - Under ABC system uses Cost drivers. |- Uner ABC System, costs of idle capacity are not assigned to products.

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