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Kapur Company manufactures two products: S and K. Manufacturing support costs are estimated to be RM2 million for the current year. Estimated unit cost and production data are as follows tems Product Product mate abor cost cost 2 per hour) 160 Estimated on units a) Required: Estimate the manufacturing cost per unit of each product if support costs are assigned to products on the traditional basis of direct labor hours Assume next that the companys manufacturing support costs can be traced to four activities as follows ost ddriver units demanded by eac product Activity costs RM Product Product Cost drivers Number of setups ctivity setups rchase ordering umber of orders umber O machine hours spection umber of Inspection b) Required: Estimate the manufacturing cost per unit of each product if an activity based costing approach is used c) A prospective customer has requested a bid on a two year contract to purchase 1,000 units of Product S every month, Kapur Company has a policy of adding a 25% mark-up to the full manufacturing cost to determine the bid price Required i) What is the bid price when the traditional costing basis is used? ii) What is the bid price when the activity based costing approach is used?

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Answer #1
Answer
Working Note
Caclculation of total hours used in production of both Prducts
Hours Per Unit Total Units Total Hours (Hrs Per Unit X Total Unit)
Per Hours in Prodcut S = (RM 24 / RM 12) = 2 Hours 25000 Units 50,000 Hours
Per Hours in Prodcut K = (RM 60 / RM 12) = 5 Hours 15000 Units 75,000 Hours
Total Hours   125,000 Hours
Calculation of Recovery rate of per Hours on Overhead = Total Overhead / Total Hours for Product S & Product K
Calculation of Recovery rate of per Hours on Overhead = $ 2,000,000 / 125,000 Hours
Calculation of Recovery rate of per Hours on Overhead = $16 Per Hours
Answer = 1
Calculation of Cost price Per units as per Traditional Costing Method
Product S   Product K
Particulars Amount in RM Amount in RM
Direct Material $                                         30.00 $                           45.00
Direct Labour Cost $                                         24.00 $                           60.00
Overhead Cost $                                         32.00 $                           80.00
(2 Hours X $ 16 Per Hours) (5 Hours X $ 16 Per Hours)
Total Cost $                                         86.00 $                         185.00
Answer =2 : Calculation of cost as per ABC Method
Step 1: Calculation of the Cost Driver Rate
Cost Driver Rate = Activity Cost / Cost Driver
Activity Cost Driver   Activity Cost / Cost Driver = Cost Driver Rate
Machine Setups Number of Setups = $ 400,000 / 500 $                       800.00
Purchasing Setups Number of Orders = $ 600,000 / 600 $                    1,000.00
Machien Hours Number of Machine Hours = $ 500,000 / 8000 $                          62.50
Inspection Number of Inspection = $ 500,000 / 500 $                    1,000.00
Step 2: Calculation of the Cost Driver Rate Per Unit Per Product
Product Cost Driver Used "X " By Cost Driver Rate   " = " To Activity Cost as per Service Department Total Units Cost Per units as per ABC
Machine Setups Number of Personal Trained
Product S                                   100 "X " By $                         800 " = " To $                 80,000 25000 $                  3.20
Product K                                   400 "X " By $                         800 " = " To $              3,20,000 15000 $                21.33
Purchasing Setups Numebr of Flights  
Product S                                   200 "X " By $                     1,000 " = " To $              2,00,000 25000 $                  8.00
Product K                                   400 "X " By $                     1,000 " = " To $              4,00,000 15000 $                26.67
Machien Hours
Product S                               2,000 "X " By $                        62.5 " = " To $              1,25,000 25000 $                  5.00
Product K                               6,000 "X " By $                        62.5 " = " To $              3,75,000 15000 $                25.00
Inspection
Product S                                   200 "X " By $               1,000.00 " = " To $              2,00,000 25000 $                  8.00
Product K                                   300 "X " By $               1,000.00 " = " To $              3,00,000 15000 $                20.00
Answer = 2
Calculation of Cost price Per units as per Activity Based Costing Method
Product S   Product K
Particulars Amount in RM Amount in RM
Direct Material $                                         30.00 $                           45.00
Direct Labour Cost $                                         24.00 $                           60.00
Overhead Cost
Machine Setups $                                           3.20 $                           21.33
Purchasing Setups $                                           8.00 $                           26.67
Machien Hours $                                           5.00 $                           25.00
Inspection $                                           8.00 $                           20.00
Total Cost Per Units $                                         78.20 $                         198.00
Answer = C)
CACLULATION OF BID PRICES AS PER TRADITIONAL AND AS PER ABC
Cost as per traditional Costing Cost as per ABC
Products S Products S
Cost Per units $                                         86.00 $                           78.20
Add: Mark-Up 25% $                                         21.50 $                           19.55
Total Bid Cost $                                      107.50 $                           97.75
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