Question

Accounting 305 CASE 1 Sarif Industries Activity-Based Costing (ABC) Quantum TM manufactures electronic testing and measurement instruments. Many products are custom-designed with recent orders for function generators, harmonic analyzers, logic analyzers, temperature measurement instruments, and data-logging instruments. The company prices its instruments at 30 percent over estimated cost (excluding administrative and selling costs). Recently, senior management has noted that its product mix has changed. Specifically, the company is receiving fewer large orders for instruments that are relatively simple to produce, and customers are saying that the company is not price competitive. The company is, however, receiving more small orders for complex instruments, and customers appear quite happy to pay Quantum TM's price. The situation was discussed at a weekly management meeting, Jason Norton, VP of operations, blamed the company's antiquated cost accounting system. "Look," he said, "if you have bad cost information, you're going to have bad prices, and we're still doing product costing the way companies did it in the 1930s. I've been reading articles about activity-based costing, and they indicate that out-of-date costing systems make simple products look too costly and complex products too cheap. If that's true, it would explain why we're not price competitive for simple products." The meeting ended with a decision to hire a consultant to conduct a preliminary ABC study to determine how a switch to ABC would affect product cost. The consulting firm selected two recent orders for study: a 900-unit order for a temperature monitoring device and an order for 1 harmonic analyzer. The cost and prices charged were as follows: Temperature Harmonic Monitor Analyzer 250 $ Component cost per unit Direct labor per unit Overhead per unit Cost per unit 2,500 500 2,500 120 395 5,500 Markup at 30% Price per unit 1,650 514 7,150 900 Number of units Value of order 462,600 $ 7,150

Answer 1

Correct Answer:

Requirement a:

	Temperature monitor	Harmonic analyser
Direct material	$                              250	$                                     2,500
Direct labour	$                                25	$                                         500
Total Cost per unit	$                              275	$                                     3,000
Units	$                              900	$                                             1
Total variable cost	$                    2,47,500	$                                     3,000
Add: Overhead allocation as per ABC
product design	$                          2,350	$                                     5,500
material ordering and handling	$                          1,360	$                                     2,000
inspection	$                          1,406	$                                         125
setup	$                          31.25	$                                     31.25
labour-related overhead
depreciation of plant and equipment	$                    8,960.00	$                                   560.00
	$              2,61,607.50	$                             11,216.25
Units	$                        900.00	$                                       1.00
Cost Per Unit	$                        290.68	$                             11,216.25
Mark-up at 30% per unit	$                          87.20	$                               3,364.88
	$                        377.88	$                             14,581.13
Number of units	$                        900.00	$                                       1.00
Value of order	$              3,40,089.75	$                             14,581.13

Requirement b:

	data logging device
Direct material	$              9,000.00
Direct labour	$              3,000.00
Total Cost per unit	$           12,000.00
Units	$                      1.00
Total variable cost	$           12,000.00
Add: Overhead allocation as per ABC
product design	$              1,100.00
material ordering and handling	$              1,200.00
inspection	$                    62.50
setup	$                    31.25
labour-related overhead
depreciation of plant and equipment	$                 800.00
	$           15,193.75
Units	$                      1.00
Cost Per Unit	$           15,193.75
Mark-up at 30% per unit	$              4,558.13
	$           19,751.88
Number of units	$                      1.00
Value of order	$           19,751.88

The lowest price sarif should offer their bid is at $ 19,752

Working:

			Tempreture monitor		Harmonic Analyzer		data logging device
		Per cost driver	Per 900 unit	Total	per unit	total	per unit	total
product design	8,000,000/160,000 =	50	47*50	$        2,350.00	110*50	$     5,500.00	22*50	$                       100.00
material ordering and handling	10,000,000/125,000 =	80	17*80	$        1,360.00	25*80	$     2,000.00	15*80	$                    1,200.00
inspection	3,500,000/560,000	6.25	225*6.25	$        1,406.25	20*6.25	$         125.00	10*6.25	$                          62.50
setup	2,500,000/800,000 =	31.25	1*31.25	$              31.25	1*31.25	$           31.25	1*31.25	$                          31.25
labour-related overhead		0.8
depreciation of plant and equipment	18,000000/225,000 =	80	112*80	$        8,960.00	7*80	$         560.00	10*80	$                       800.00

End of answer.

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