Question

Exercise 17-12 Using ABC for strategic decisions LO P1, P3 Consider the following data for two products of Gitano Manufacturing. (Loss amounts should be indicated with a minus sign. Round your intermediate calculations and "OH rate and cost per unit" answers to 2 decimal places.) Product A Products Number of units produced 12,000 units 1,200 units Direct labor cost (e $31 per DLH) 0.15 DLH per unit 0.24 DLH per unit Direct materials cost $ 1.70 per unit $ 2.50 per unit Activity Machine setup Materials handling Quality control inspections Overhead costs $ 59,224 59,000 65,520 $183, 744

Answer 1

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Giláno Manufacturing lo using direct laurour hours as the leasis for assigning Querhead cost decérmire the total produccion cost per unit for each product line Product A Product B Total No. of unico 12,000 1200 dviert lamour hour per units 0.15 DLH 0124 DLH 2,088 Total direct lawan hours 1,800 Note Total direct lavor hours = No. of emits produced * Direct latior hours unit - per 288 Total ourhead cost Total direct latior hours Ouwehend Mate (plantiwide) $183,744 3088 $183,344 2,088 $ 88 dient lauor costs Product A Product B $55,800 $8,928 (1800 hours 1 (288 hours x $ 31 per DLH 1 x $ 31 per DLH) . direct lalove cool per unit Product A Product B Total larior cost $ 55,800 $8,928 12poo 1200 87.64 direct lanau wot . 55,800 / 8928 12,000 Total no. of units 1,200 Manufacturing Ownhead Apli per unit leased on plant wide Ouerhead rate OH Cost Querhead vassigned Activity Plantwiele driner, Total OH lost Units Produced OH Rate per unit Product A Kako bom ол. 12,000 $88.00 Lahion hound $88.00 $158400 $ 25,344 $13.20 $21.12 Product B 1,200 Note : Total Querhead cost- Product A 1800 direct labor hours x $88 - $15.8400 Prodent B 288 diree lavor hours X $88 = $25344 Cost per unit Product A level quaterial cost per unit $1.70 direct lauote cost perint $4.65 Ouerheads per unit $13.20 total amanujertering coer per uniel $19.55 Product B $2.50 $ 7.44 $21.12 $31.06

2. Calculation of proft / loss per unit for each product Product A Product B Market Price $24.67 $56.00 $ 31,06 Manufacturing cost per $ 19.55 $24.94 Profil per unit $5:12 Profit Market price Manufacturing cost unet

TOTAL 3. Cost per unit of Product A and Product B if ABC is used to assign overhead cost PRODUCT A PRODUCT B Number of setups required for production 9 setups 28 setups Number of parts required 10 parts/unit 8 parts/unit Inspection hours required 58 hours 215 hours 37 129600 273 NOTE: Number of parts required =9600 10*12000 =120000 8*1200 120000 + 9600 = 129600 MANUFACTURING COST PER UNIT USING ABC COSTING Activity Rate Machine Setup Total machine setup cost $59,224 $1,600.65 per setup Total setups 37 Material Handling Total Material Handling Cost Total parts $0.46 per part $59,000 129600 Quality Control Total Quality Control cost Total inspection hours $65,520 273 $240 per inspection hour

Overhead asssigned Activity Driver Activity Rate Total Overhead Cost PRODUCT A Machine Setup Material Handling Quality Control TOTAL OVERHEADS No of units produced Overhead Cost per unit 9 setups 10 parts/unit 58 hours $1,600.65 per setup $14,405.85 $0.46 per part/unit $55,200.00 12000*10*$0.46 $240.00 per hour $13,920.00 $83,525.85 12,000 $6.96 PRODUCT B Machine Setup Material Handling Quality Control TOTAL OVERHEADS No of units produced Overhead Cost per unit 28 setups 8 parts/unit 215 hours $1,600.65 per setup $44,818.20 $0.46 per part/unit $4,416.00 1200*8*$0.46 $240.00 per hour $51,600.00 $100,834.20 1,200 $84.03 NOTE: Overhead cost per unit = Total overhead cost/ No of units produced TOTAL MANUFACTURING COST PER UNIT Direct material cost per unit Direct labor cost per unit Overhead per unit TOTAL MANUFACTURING COST PER UNIT PRODUCT A $1.70 $4.65 $6.96 $13.31 PRODUCT B $2.50 $7.44 $84.03 $93.97

4 Profit/Loss for each product using ABC costing Market Price Manufacturing cost per unit Profit/Loss per unit Product A Product B $24.67 $56 $13.31 $93.97 $11.36 ($37.97)

4.2 Yes, it will influence the company strategy as product B is generating loss when using ABC costing system.

Note:The answers have been rounded off at certain places.