Question

Question 1 (allocating costs using ABC, product profit margin) My NC 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) 100 200 300 Ravenue 510,000 350,000 560.000 Costs direct materials $2.000 $10,000 $12.000 direct labor 55.000 520,000 $25,000 OH costs $19.500 Profit $3.500 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 $19.500 into 3 cost pools "labor related" - the total cost in this pool is $5.000, allocated based on direct labor dollars "sales.related" - the total cost in this pool is $4.500, allocated based on number of units "production setups - the total cost in this pool is $10.000, allocated based on the number of production batches. A is produced in batches of 10 units, and is produced in batches of 5 units. Required: the focal Number of batch 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 poolyou will have to compute the number of batcher. add up to 50, you are doing something wrong) • "labor-related pooli activity rate per DLS Labor related OH costs allocated to A S Labor_related OH costs allocated to B S sales-related poolt activity rates per unit Sales related OH costs allocated to A S Sales_related OH costs allocated to B SL production setups poolt activity rate S p er batch Production setups OH costs allocated to A-S Production setups OH Costs allocated to D S b) using the allocated OH costs from ). compute the profit margin for product A and product B. If you get a negative number, enter it with a minun, Le enter negative S100 3100.net (100) profit margin for A S profit margin for B S

Answer 1

Answer a)

Allocation of overheads to Product A and Product B

Labour related pool:

Activity rate = Total labour related overhead cost/ Total direct labour dollars

                       = $ 5,000/ $ 25,000

                       = $ 0.20 per direct labour dollar

Allocation of overheads: Labour related

Labour related overhead cost allocated to Product A = Direct labour cost of Product A (in dollars) X Activity rate

                                                                                     = $ 5,000 X $ 0.20 per direct labour dollar

                                                                                    = $ 1,000

Therefore labour related overhead cost allocated to Product A is $ 1,000.

Labour related overhead cost allocated to Product B = Direct labour cost of Product B (in dollars) X Activity rate

                                                                                     = $ 20,000 X $ 0.20 per direct labour dollar

                                                                                    = $ 4,000

Therefore labour related overhead cost allocated to Product B is $ 4,000.        

Sales related pool:

Activity rate = Total Sales related overhead cost/ Total number of units sold

                       = $ 4,500/ 300 units

                       = $ 15.00 per unit sold

Allocation of overheads: Sales related

Sales related overhead cost allocated to Product A = (Total number of units sold of Product A) X Activity rate

                                                                                     = 100 units X $ 15.00 per unit sold

                                                                                    = $ 1,500

Therefore Sales related overhead cost allocated to Product A is $ 1,500.

Sales related overhead cost allocated to Product B = (Total number of units sold of Product B) X Activity rate                                                                                    

                                           = $ 200 X $ 15.00 per unit sold

                                                                                    = $ 3,000

Therefore Sales related overhead cost allocated to Product B is $ 3,000.

        

Production setups pool:

Activity rate = Total production setup based overhead cost/ Total number production batches

                       = $ 10,000/ 50 batches

                       = $ 200 per batch

Allocation of overheads: Production setup based

Production setups overhead cost allocated to Product A = (Total number production batches of Product A) X Activity rate

                                                                                     = 10 batches X $ 200 per batch

                                                                                    = $ 2,000

Therefore Production batch related overhead cost allocated to Product A is $ 2,000.

Production setups overhead cost allocated to Product B = (Total number production batches of Product B) X Activity rate

                                                                                     = 40 batches X $ 200 per batch

                                                                                    = $ 8,000

Therefore Production batch related overhead cost allocated to Product B is $ 8,000.

Working Notes:

Calculation of Total number of batches of both products:

Product A is produced in batches of 10 units, therefore total number of batches is:

Total number of batches of Product A = Total units of product A Produced/ units per batch

                                                                    = 100 units / 10 units

                                                                    = 10 batches

Therefore 100 units of product A are produced in 10 batches.

Product B is produced in batches of 5 units, therefore total number of batches is:

Total number of batches of Product B = Total units of product B Produced/ units per batch

                                                                    = 200 units /5 units

                                                                    = 40 batches

Therefore 200 units of product B are produced in 40 batches.

Total number of batches = Number of batches of Product A + Number of batches of Product B

                                              = 10 batches + 40 batches

                                              = 50 batches.

Therefore total number of batches of both products is 50.

Answer b)

Statement showing profit margins of Product A and Product B

Particulars	Product A	Product B	Total
Revenue	$ 10,000	$ 50,000	$ 60,000
Costs:
direct materials	$ 2,000	$ 10,000	$ 12,000
direct labour	$ 5,000	$ 20,000	$ 25,000
Overhead Costs:
Labour related overhead costs	$ 1,000	$ 4,000	$ 5,000
Sales related overhead costs	$ 1,500	$ 3,000	$ 4,500
Production setups related overhead costs	$ 2,000	$ 8,000	$ 10,000
Net Profit	-$ 1,500	$ 5,000	$ 3,500

Therefore Profit for product A is -$ 1,500 and Products B is $ 5,000.

Calculation of Profit margin:

Profit margin = (Net Profit / Total revenue) X 100

Profit margin of product A = (-$ 1,500/ $ 10,000) X 100

                                                 = -15%

Therefore, profit margin for product A is -15%

Profit margin of product B = ($ 5,000/ $ 50,000) X 100

                                                 = 10%

Therefore, profit margin for product B is 10%