Activity-Based Costing Johnson Marine manufactures marine radios in three models the 1600 model for the small boat enthusiast who will not venture far from shore, and the 2400 and 3600 models for the those with the need for more features, range, and sensitivity. Johnson manufactures only these three products. Johnson has the following manufacturing activities and the budgeted cost for each:
| Cost |
Setup labor | $ 231,000 |
Equipment | 135,660 |
Assembly | 739,500 |
Materials handling | 405,000 |
Purchasing | 92,400 |
Inspection | 325,000 |
| $1,928,560 |
Johnson uses a volume-based costing system that is based on labor-hours, since the assembly operation is the largest cost operation in the company. The direct labor rate is $22 per hour. Johnson is considering an ABC approach to calculating product cost and has selected the following cost drivers for each activity:
Activity | Driver |
Setup labor | Number of setups |
Equipment | Machine-hours |
Assembly | Direct labor-hours |
Materials handling | Weight of materials |
Purchasing | Materials cost |
Inspection | Number of orders shipped |
Johnson also has the following budgeted production data for the three products:
| 1600 | 2400 | 3600 |
Units produced | 10,000 | 4,000 | 1,000 |
Price | $ 200 | $ 350 | $ 600 |
Production orders | 25 | 70 | 200 |
Production setups | 10 | 50 | 50 |
Orders shipped | 100 | 400 | 800 |
Direct materials cost per unit | $ 40 | $ 70 | $ 90 |
Weight of materials per unit | 1 | 3 | 5 |
Direct labor-hours per unit | 3 | 4 | 5 |
Machine-hours per unit | 6 | 8 | 10 |
Required
1. Determine the unit cost for each of the three products using the current volume-based system.
2. Determine the unit cost for each of the three products using the ABC method.
3. Interpret the difference between your findings in requirements 1 and 2.
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