Question

Newcastle Industrial Manufacturers (NIM) manufactures parts that are used in large earthmoving trucks typically used in the mining industry. It specialises in the production of 3 parts: A-12, P-37 and K-51. NIM has produced K-51 in high volume for many years, however demand has steadily declined over the past 2 years. NIM recently lost one of its major customers for the part as they were able to buy an equivalent part for 10% less form a foreign manufacturer. Recent analysis by the marketing manager indicates it is very difficult for NIM to meet current competitor pricing for the K-51 equivalent parts. A-12 and P-37 are more recent additions to NIM’s product offerings and significantly more complex to manufacture than the K-51. Both the A-12 and P-37 require special tools and set-ups for each batch. NIM believes it has to set a premium price for both of these parts to account for the complexities involved in their manufacture. NIM currently uses a traditional product costing system, allocating overhead based on machine hours. The current direct costs per unit are as follows:

A-12    P-37 K-51

   $    $       $

Direct materials 18.00 24.24   15.00

Direct labour 1.08 3.24 2.16

NIM’s management have asked you, as the newly appointed Management Accountant, to advise on cost management matters. They would like you to examine the possibility of using activity-based costing. You have gathered the following information regarding overhead costs and activity drivers for the past 12 months

Activity cost pools $

Production setup 883,575

Machining of parts 504,900

Materials handling 378,675

Quality control 757,350

Total 2,524,500

Activity cost drivers

Part Material Movements Setups Labour hours Inspections Machine hours Product volume

A-12 15 90 450 180 1,350   9,000

P-37     25 138 2,250   216 1,500 15,000

K-51 104 576 8,400 804 25,200 84,000

Total 144 804 11,100 1,200   28,050 108,000

Calculate the total unit cost of the three products using NIM’s traditional method of cost allocation.

Answer 1