Question

Exercise 3 ABC system Lake LLC assembles 3 types of vehicles: Sunshine, Roadster, Firewall. Recently the company invested into machinery a lot, decreasing the level of labor force used. Historically the company has allocated all overhead costs using total direct labour hours, but now considering to use ABC system. The following information is provided below: Annual output Selling price/unit Sunshine Roadster Firewall 2000 1600 I 400 Annual direct labor hours 200000 220000 80000 4000 6000 8000 Raw material cost/unit 400 600 900 The 3 cost drivers generate overbeads The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows # of Setups Number Deliveries to retailer # of Purchase orders Annual overhead cost Sunshine 100 35 400 2,400,000 300 Roadster Firewall 80 70 40 25 6,000,000 3,600,000 100 All direct labour is paid USD 5/hour. The company holds no inventory. Required: 1. Calculate the total profit on each three types of products using Existing method based on labour hours 2 ABC system Write a report to the directors of the company and evaluate the labour hours and ABC system methods in the circumstances of the company. Examine the implications of ABC system for the company.

Answer 1

Calculation of Plant wide OH Rate	Sunching	Roadster	Firewall	Total	Note
Overhead costs	2,400,000.00	6,000,000.00	3,600,000.00	12,000,000.00	A
Direct Labor Hours	200,000.00	220,000.00	80,000.00	500,000.00	B
Predetermined OH Rate				24.00	C=A/B
Overhead cost per unit	Sunching	Roadster	Firewall	Note
Direct Labor Hours	200,000.00	220,000.00	80,000.00	D
Predetermined OH Rate	24.00	24.00	24.00	See C
Allocated OH	4,800,000.00	5,280,000.00	1,920,000.00	E=C*D
Units produced	2,000.00	1,600.00	400.00	F
Overhead cost per unit	2,400.00	3,300.00	4,800.00	G=E/F
Labor cost per unit	Sunching	Roadster	Firewall	Note
Direct Labor Hours	200,000.00	220,000.00	80,000.00	D
Labor Hour rate	5.00	5.00	5.00	See C
Direct Labor cost	1,000,000.00	1,100,000.00	400,000.00	E=C*D
Units produced	2,000.00	1,600.00	400.00	F
Labor cost per unit	500.00	687.50	1,000.00	G=E/F
Calculation of profit per unit	Sunching	Roadster	Firewall
Selling price	4,000.00	6,000.00	8,000.00
Less:
Direct Material	400.00	600.00	900.00
Direct Labor	500.00	687.50	1,000.00
Overhead cost per unit	2,400.00	3,300.00	4,800.00
Profit per unit	700.00	1,412.50	1,300.00