Question

Problem 17-1A Comparing costs using ABC with the plantwide overhead rate LO P1, P3, A1, A2 The following data are for the two products produced by Tadros Company Direct materials Direct labor hours Machine hours Batches Volume Engineering modifications Number of customers Market price Product A $15 per unit 0.5 DLH per unit 0.4 MH per unit 90 batches 10,000 units 10 modifications 500 customers $35 per unit Product B $28 per unit 1.5 DLH per unit 1.1 MH per unit 180 batches 2,000 units 50 modifications 400 customers $120 per unit The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows. Costs Driver Indirect manufacturing Engineering support Electricity Setup costs Nonmanufacturing Customer service $26,000 Engineering modifications 24,800 Machine hours 42,000 Batches 74,000 Number of customers

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Answer 1

1. Compute the manufacturing cost per unit using the plant wide overhead rate based on direct labor hours.
Overhead costs	92800	11.6	per DLH
Direct labor hours	(0.5*10,000+1.5*2000) = 8000
Overhead Assigned	Activity Driver	Plantwide OH rate	Total Overhead Cost	Units Produced	OH Cost per unit
Product A	5,000	11.6	58,000	10,000	5.8
Product B	3,000	11.6	34,800	2,000	17.4
		Product A	Product B
Direct Material		15	28
Direct Labor		10	30
Overhead		5.8	17.4
Cost per Unit		30.8	75.4
1.2 What is the gross profit per unit?
		Product A	Product B
Market price		35	120
Cost per Unit		30.8	75.4
Gross profit per unit		4.2	44.6
2.1 How much gross profit is generated by each customer of Product A and Product B using the plantwide overhead rate?
		Product A	Product B
Gross profit per unit		4.2	44.6
Units purchased per customer = Total units/Total customers		20	5
Gross profit per customer		84	223
2.2 What is the cost of providing customer service to each customer?
		82.2222222
Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate?
		Product A	Product B
Gross profit per customer		84	223
Customer service cost per customer		82.2222222	82.2222222
Profit (loss) per customer		1.77777778	140.777778
Is the profit adequate?		Yes	Yes
3.1 Determine the manufacturing cost per unit of each product line using ABC.
Engineering Support	26,000	60	433.333333
Electricity	24,800	6,200	4
		0
Setup	42,000	270	155.555556
Overhead Assigned	Activity Driver		Activity rate		Total Overhead Cost
Product A
Engineering support	10		433.333333		4,333
Electricity	4,000		4		16,000
Setup	90		155.555556		14,000
					$34,333
Product B
Engineering support	50		433.333333		21666.6667
Electricity	2200		4		8800
Setup	180		155.555556		28000
					$58,467
Total manufacturing costs		Product A	Product B
Direct Materials per unit		15	28
Direct Labor per unit		10	30
Overhead per unit		$3.43	$29.23
Total manufacturing cost per unit		28.4333333	87.2333333
3.2 What is the gross profit per unit?
		Product A	Product B
Market price		35	120
Cost per Unit		28.43	87.23
Gross Profit		6.57	32.77
4.1 How much gross profit is generated by each customer of Product A and Product B using ABC?
		Product A	Product B
Gross profit per unit		6.57	32.77
Units purchased per customer		20	5
Gross profit (loss) per customer		131.4	163.85
		Product A	Product B
Gross profit per customer		131.4	163.85
Customer service cost per customer		82.22	82.22
Profit (loss) per customer		49.18	81.63
Is the profit adequate?		Yes	Yes
ABC produces better information