Question

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass. Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply: BRASS CHROME WHITE 30,000 50,000 40,000 Projected sales in units PER UNIT data: Selling price $40 $20 $30 $8 $15 $8 Direct materials Direct labor Overhead cost based on direct labor hours (traditional system) $12 $3 $9 Hours per 1000-unit batch: Direct labor hours Machine hours Setup hours Inspection hours 1.0 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Direct labor hours Machine hours Setups $465,500 Inspections $405,000 $870,500 Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours Required: 1. Using the traditional system, determine the operating profit per unit for the brass style of faucet. (3 points) 2. Determine the activity-cost-driver rate for setup costs and inspection costs. (2 points) 3. Using the ABC system, for the Brass style of faucet: a. compute the estimated overhead costs per unit. (4 points) b. compute the estimated operating profit per unit. (2 points) 4. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why? (4 points)

Answer 1

Dear Student ,

Please see below answer step by step to understand derive of operating Profit under Traditional Method vs ABC ( Activity based system) method. Also you will understand which system is idea for company to derived profit

Using Traditional System - determined Operating Profit Per unit Brass Style
Projected Sales in Unit-30,000 Unit	Amnt($)	Amnt($)
Selling Price ( $ 40/ Unit )-A
(30,000 Unit @ 40		12,00,000
Less -
Direct Material
( $ 8 / unit)- 30,000 Unit	2,40,000
Direct Labour
( $ 15 / unit)- 30,000 Unit	4,50,000
Overhead cost based	14,400
on direct Labour Hr-$12
As per Question -
Hours per 1000 unit batch
Direct Labout hr = 40 Hr
(30000/1000*12*40)
Total cost- B		7,04,400
Net Operating Profit (A-B)		4,95,600
Operating profit / Unit ($/ Unit
$495600/30000 Unit		16.52
Activity cost driver rate Set up cost + Inspection Cost]
	Amnt($)-A	Activity Level-B		Cost driver rate-$/ Hr
Set Up cost	4,65,600
Inspetion cost	4,05,000
Cost driver use
Set Up		95	Set up Hrs
Inspetion		2,700	Inspection Hrs
Set Up cost- Set up cost/Activity Level)	465600/95			4,901	Per hr
Inspetion cost-Inspection cost/Activity Level)	405000/2700			150	Per hr
ABC SYSTEM - Overhead cost / unit - Brass
Projected sales unit	30,000
Set up per hr( as calculated above) $/ hr	4,901
Hours per 1000 unit batch	1,000
Set up hrs	1
Set up cost $-A	1,47,030
(30000/1000*4901*1)
Inspection cost
Inspection cost per hr( as calculated above) $/ hr	150
Hours per 1000 unit batch	1,000
Inspection hrs	30
Inspection cost $-B	1,35,000
(30000/1000*150*30)
Total Set Up+ Inspection cost A+B== $	2,82,030
Projected sales unit	30,000
Overhead cost / unit($/ Unit)	9.40
(282030/30000)
With help of Above Overhead cost / unit - calculate
Operating Profit/ Unit	($/ Unit)	($/ Unit)
Selling Price		40
Less
Direct Material	8.00
Direct Labour	15.00
Overhead cost ( as above )	9.40
Total cost		32.40
Operating Profit		7.60
As per traditional system Operating Profit ( $/ unit)			16.52
As per ABC system Operating Profit ( $/ unit)			7.60

Tradition system Operating profit may be higher than ABC system but ABC system provide correct picture of companies financial position. Under ABC based costing system , All overhead cost has been allocated correct way and determined Operating Profit . Under ABC costing system , considered proper Overhead cost ( Set up + Inspection cost ) . Allocated Overhead cost in systematic way to derive correct Operating profit