Question

Question 1 (allocating costs using ABC, product profit margin) Generic Motors Corporation has two product lines, A and B. Its revenue and costs for last year is as follows: Product A Product B Total sales volume (units) 50 100 150 Revenue 53,000 $15,000 $18,000 Costs: direct materials 5600 $3,000 $3,600 direct labor $1,500 $6,000 $7,500 OH costs $5,850 Profit $1,050 Generic Motors uses ABC to allocate the overhead costs. It examined the main activities in the firm, and decided to break up the total overhead costs of $5,850 into 3 cost pools: * "abor-related" - the total cost in this pool is $1,500, allocated based on direct labor dollars * "sales-related the total cost in this pool is $1,350, allocated based on number of units * "production setups - the total cost in this pool is $3,000, allocated based on the number of production batches. Als produced in batches of 10 units, and B is produced in batches of 5 units. Required: a) for each cost pool, compute the activity rate and the amounts allocated to product A and product B. (hint: The amounts allocated to A and B from each pool should add up to the total cost in that pool. To allocate the costs in the production setups" pool, you will have to compute the number of batches. If the total number of batches for A and B does not add up to 25, you are doing something wrong). * "abor-related" pool: activity rate = 5 per DLS Labor-related OH costs allocated to A = $ Labor_related OH costs allocated to B = $ * "sales-related pool: activity rate = 5 per unit Sales-related OH costs allocated to A = $ Sales_related OH costs allocated to B = $ * "production setups' pool: activity rate = 5 per batch Production setups OH costs allocated to A = $ Production setups OH costs allocated to B = $ b) using the allocated OH costs from (a), compute the profit margin for product A and product B. If you get a negative number, enter it with a minus sign, i.e., enter negative $100 as -100, not ($100) profit margin for A = $ profit margin for B = $

Answer 1

Labor related

Activity Rate = Overheads/Labor dollars

= 1,500/7,500

= $0.2 per dollar

A = 0.2*1,500 = $300

B = 0.2*6,000 = $1,200

Sales related

Rate = 1350/150 = $9 per unit

A = 50*9= 450

B = 100*9 = 900

Production Set up

Rate = 3,000/(50/10 + 100/5)

= $120 per batch

A = 5*120 = $600

B = 20*120 =$2,400

Profit Margin for A = 3,000-600-1500-300-450-600 = -$450

B = 15,000-3,000-6,000-1200-900-2400 = $1,500