Question

need numbers 5-9 answered

ACC 212 Challenge Activity-Based Costing e president of the profitability of the company product lines wants you to examine the current station in traditional approach of locating overhead wants you to apply Activity Based Casting (ABC) to develop a new product out for each product line. Third, she the wants your own about the best approach to use to determine the producti o n Revenue: The expected level of sales is 200 units of each product Product A Product se priceperit priceper $12.000 $19.000 Costs The expected level of production is 200 nits of each product 1. Direct Material cost per unit Product A Direct Material cost per unit Products $5,400 $8.370 2. Direct Labor cost per unit Product A Direct Labor cost per unit Products 5340 5700 3. Factory Overhead Activities: a. Every product is inspected. b. Product A moving parts oiled: Product moving parts oiled: 5 parts per unit 3 parts per unit c. Material is delivered to each of the product lines on a daily basis. Product A 5 times per week Product B 5 times per week d. Product A redesign: Product Bredesign: 5 hours per week 20 hours per week e. Product A supplier purchase orders: Product B supplier purchase orders: 5 times per week 2 times per month 1. Facility administration is based on square footage: Product A 12,000 square feet Product B 8,000 square feet Activity Inspection Lubricating oil Material handling Product design Purchase orders Facility Administration Total factory overhead Total Estimated Annual Activity Cost Cost Driver units soil applications deliveries redesign hours purchase orders square footage Estimated cost $93.000 $5,800 $12,200 $121,000 $48,000 $32,000 $312.000

Answer 1

Solution:

1. Calculation for factory overhead using traditional approach Direct Labour Cost per unit Overhead allocation per unit (150% of Direct labour Cost) $510 $1,050 Total Overhead Allocation (@200 units of Product) $102,000 $210,000 $312,000 Product A Product B $340 $700 Total 2) Calculation factory overherad allocated to the product lines using Activity based costing System. a) Calculation for Planned Activity level for 200 units Cost Drivers Products Inspected oil applications deliveries Total Planned Activity Level 400 inspection 1600 Parts 520 Deliveries Product A activity level for 200 units 200 inspection 1000 Parts 260 Deliveries (5 X 52 weeks in Year) 260 Hours (5 x 52 weeks in year) 260 Orders (5 times x 52 Weeks in year) 12000 square feet Product B activity level for 200 units 200 inspection 600 Parts 260 Deliveries (5 X 52 weeks in Year) 1040 Hours 20 X 52 weeks in year) 24 Orders (2 times x 12 months In year) 8000 Square feet redesign hours 1300 Hours purchase orders 284 Orders square footage 20000 Square Feet b) Calculation for planned activity rate for each cost pool using Activity based costing Method Activity tincil Inspection Lubricating oil Material Handling Product Design purchase orders Facility Administration Estimated Cost per Activity $93,000 $5,800 $12,200 $121,000 $48,000 $32,000 Total Planned Activity Level 400 inspection 1600 Parts 520 Deliveries 1300 Hours 284 Orders 20000 Square Feet Planned Activity Rate $232.50 Per Inspection $ 3.625 per Part $ 23.462 per Delivery $ 93.077 per Hour $ 169.014 per order $ 1.60 per square feet

c) Calculation for total overhead assigned to each activity Activity Inspection Lubricating oil Material Handling Product Design purchase orders Facility Administration Total Overhead Per Unit Product A $46,500 $3,625 $6,100 $24,200 $43,944 $19,200 $143,569 $ 718 Per Unit Product B $46,500 $2,175 $6,100 $96,800 $4,056 $12,800 $168,431 $ 842 per unit Total $93,000 $5,800 $12,200 $121,000 $48,000 $32,000 $312,000 3) Comparision of total overhead based on traditional Method VS Activity Based Costing Factory Overhead Product A- 200 Units Product B-200 Units Total Traditional $ 102,000 $210,000 $312,000 ABC $143,569 $168,431 $312,000 Difference -$41,569 $41,569 4) Calculation for Unit cost under both methods Traditional Method Direct Materials per product Direct Labour Per product Factory Overhead Per Product Total cost per Product Product A $5,400 $340 $510 $6,250 Product B $8,370 $700 $1,050 $10,120 ABC Method Direct Materials per product Direct Labour Per product Factory Overhead Per Product Total cost per Product Product A $5,400 $340 $718 $6,458 Product B $8,370 $700 $842 $9,912

5) Calculation for Estimated Gross profit under both methods Traditional Method Revenue Cost of Goods sold Gross Profit Product A $12,000 $6,250 $5,750 Product B $19,000 $10,150 $8,850 ABC Method Revenue Cost of Goods sold Gross Profit Product A $12,000 $6,458 $5,542 Product B $19,000 $9,912 $9,088 6) Pricing of Products under Both Methods Product A: Product A is underpriced under Traditional Method of Costing as compared to ABC method Product A: Product B is Overpriced under Traditional Method of Costing as compared to ABC method 7) Under Traditional Method of Costing most overheads charged to Production 8) Effect on Net Income: there will be no effect on Net overall income of the Enteprise. As all the Expenses will ultimately included in Financial Income Statement. But there will be the difference in amount of Gross Profit under both the methods.

9) Advantage & Dsadvantage of Traditional and ABC method Traditional Method: Advantage: Traditional costing assigns expenses according to an average overhead rate Companies calculate this rate by pooling all indirect costs and applying them equally in a common unit, like Labour hours. Then they calculate the cost of each product or service using the same rate. This is less complex than activity-based costing Disadvantage: Lack of detailed calculations distorts actual overhead expenses. It skews vital measures like a product's profitability by assigning costs arbitrarily instead of considering each activity for a particular product. ABC Method Advantage: ABC brings accuracy and reliability in product cost determination by focusing on cause and effect relationship in the cost incurrence.lt recognises that it is activities which cause costs, not products and it is product which. consume activities. In advanced manufacturing environment and technology where support functions overheads constitute a large share of total costs, ABC provides more realistic product costs. Disadvantage: ABC has numerous cost pools and multiple cost drivers and therefore can be more complex than traditional product costing systems. It is also not suitable for Small organisations.Some difficulties emerge in the implementation of ABC system, such as selection of cost drivers, assignment of common costs, varying cost driver rates etc.