Question

Kagle design engineers are in the process of developing a new “green” product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).

Unit-based system:
Variable conversion activity rate: $120 per direct labor hour
Material usage rate: $30 per part

ABC system:
Labor usage: $15 per direct labor hour
Material usage (direct materials): $20 per part
Machining: $80 per machine hour
Purchasing activity: $150 per purchase order
Setup activity: $3,600 per setup hour
Warranty activity: $500 per returned unit (usually requires extensive rework)
Customer repair cost: $25 per repair hour (average)

Activity and Resource Information (annual estimates)
	Design A		Design B
Units produced	20,000		20,000
Direct material usage	350,000	parts	325,000	parts
Labor usage	60,000	hours	130,000	hours
Machine hours	60,000		70,000
Purchase orders	2,000		1,500
Setup hours	800		200
Returned units	1,300		350
Repair time (customer)	2,100		600

Required:

1. Select the lower-cost design using unit-based costing.
- Select your answer -Design ADesign BItem 1

Are logistical and post-purchase activities considered in this analysis?
- Select your answer -YesNoItem 2

2. Select the lower-cost design using ABC analysis.
- Select your answer -Design ADesign BItem 3

3. What if the post-purchase cost was an environmental contaminant and amounted to $15 per unit for Design A and $40 per unit for Design B? Compute the Post-purchase cost for each design.

	Post-Purchase Cost
Design A	$
Design B	$

Assume that the environmental cost is borne by society. Now which is the better design?
- Select your answer -Design ADesign B

Answer 1

1. Computation of Cost per unit using Unit based system Design A Design B 350000 parts/20000 units -17.5 part 325000 parts/20000 units -16.25 part er unit $30 $487.50 60000 hours/20000 units 3 hours per 130000 hours/20000 units 6.5hours r unit $120 $780 $1,267.50 Direct Material Cost per unit er unit* $30 $525 unit $120 $360 $885.00 Variable Conversion Cost per unit Cost per unit Lowest Cost Design is Design A No, logistical and post purchase activities are not considered in this analysis since only direct material cost and variable conversion cost has been taken into consideration while calculating manufacturing cost per unit 2. Computation of Cost per unit using ABC analysis Design A Design B 350000 parts/20000 units -17.5 part 325000 parts/20000 units -16.25 part er unit* $20- $325 60000 hours/20000 units 3 hours per 130000 hours/20000 units 6.5hours er unit $15 $97.50 60000 hours/20000 units 3 hours per 70000 hours/20000 units 3.5hours er unit $80 $280 1500 orders *$150 per order-300000/20000 units $15 order-225000/20000 units $11.25 200 setup hours*$3600 per hour-2880000/20000 units $144 hour-720000/20000 units $36 350 returned units*$500 per unit -175000/20000 units $8.75 600 repair hours $25 per hour-52500/20000 units $2.625 hour-15000/20000 units $0.75 $759.250 er unit $20 $350 Direct Material Cost per unit Direct labor Cost per unit Machining Cost per unit Purchasing Cost per unit Setup Cost per unit Warranty Cost per unit unit* $15 $45 unit* $80 = $240 2000 orders $150 per 800 setup hours*$3600 per 1300 returned units*$500 per unit -650000/20000 units $32.50 2100 repair hours $25 per Customer Repair Cost per unit Cost per unit $829.125 Lowest Cost Design is Design B

3. Computation of Post purchase Cost per unit using Unit Based System Design A Design B Cost per unit Post puchase cost Cost per unit $885.00 $15.000 $900.000 $1,267.50 $40.000 $1,307.50 Computation of Post purchase Cost per unit using ABC analysis Design A Design B Cost per unit Post puchase cost Cost per unit $15.000 $844.125 $759.250 $40.000 $799.250 If the envirnmental cost is borne by society, then Design A is better since environment cost is less in Design A than Design B.
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