Question

The Managing Director has come to you on a Friday afternoon all inspired from a conference she has just been on about Activity Based Costing. The conference focus was on the costs and benefits of implementing activity-based costing (ABC) method. The managing director has asked for you to prepare an analysis comparing two products – Compact Discs (CD) and Vinyl Records.

The firm has always applied overhead (OH) to products based on direct labor-hours (DLH) as a cost driver. The OH has been calculated to be $15.00 per DLH. The following data summaries the company’s sales and cost estimated for 2014.

2019 Sales and Cost estimates	Vinyl Records	CD
Forecast Sales (Units)	200,000	20,000
Selling price per unit($)	$12	$15
Prime Costs per unit	$6	$8
DLH per Unit	0.25	0.25
OH per DLH	$4	$4

Activity	Cost	Cost Driver	Amount of Cost Driver
			Vinyl Records	CD
Machining Set Ups	$94,000	Set up Hours	50	200
Electronic Assembly	$35,500	Machine Hours	30,000	70,000
Quality Control	$65,500	QA Samples per 10,000 units	150,000	250,000
Packaging	$25,000	Number of Orders	2,600	3,400
Total Activity Costs	$220,000

Required:

1. Using the current factory-wide cost driver method of applying overhead develop a spreadsheet to calculate for each product the expected:
   1. Gross Proft per unit,
   2. Total Gross Profit per Model, and
   3. Total Firm Gross Profit
   2. Using the activity cost data provided conduct the same analysis utilizing Activity Based Costing techniques to again calculate for each model the expected:
   3. 1. Gross Proft per unit,
      2. Total Gross Profit per Model, and
      3. Total Firm Gross Profit

Answer 1

Using current factory-wide cost driver:

	Vinyl Records		CD		Remarks
	Per Unit	Total	Per Unit	Total
Units		200000		20000
Sales	12	$2,400,000	15	$300,000	Total = Per Unit Value x No. of Units
Prime Costs	6	$1,200,000	8	$160,000	Total = Per Unit Value x No. of Units
DLH	0.25	50000	0.25	5000	Total = Per Unit Value x No. of Units
OH	1	$200,000	1	$20,000	OH per Unit = OH per hour x DLH per unit. Total = Per Unit Value x No. of Units
Gross Profit	5	$1,000,000	6	$120,000	Total = Per Unit Value x No. of Units

And total firm gross profit = $1,120,000 [$1000000 + $120000]

Using ABC:

Part A: Cost per driver

Activity	Cost	Cost Driver	Amount of Cost Driver
			Vinyl Records	CD	No. of activities	Cost per activity = Cost/No. of activities
Machining Set Ups	$94,000	Set up Hours	50	200	250	376.000
Electronic Assembly	$35,500	Machine Hours	30,000	70,000	100000	0.355
Quality Control	$65,500	QA Samples per 10,000 units	1,50,000	2,50,000	400000	0.164
Packaging	$25,000	Number of Orders	2,600	3,400	6000	4.167
Total Activity Costs	$220,000

Part B: ABC

	Amount of Cost Driver			Cost (Amount of Cost Drivers x Cost per activity)
	Vinyl Records	CD	Cost per activity (from Part A)	Vinyl Records	CD
Machining Set Ups	50	200	$376.000	$18,800.00	$75,200.00
Electronic Assembly	30000	70000	$0.355	$10,650.00	$24,850.00
Quality Control	150,000	250000	$0.164	$24,562.50	$40,937.50
Packaging	2600	3400	$4.167	$10,833.33	$14,166.67
Prime Costs				$1,200,000.00	$160,000.00
TOTAL COST				$1,264,845.83	$315,154.17
Cost per Unit (Total/No. of Units				$6.32	15.76
Sale Value				$2,400,000	$300,000
Gross Profit (Sale value - Total Cost)				$1,135,154.17	-$15,154.17

And total firm gross profit = $1,120,000 [$1135154.17 - $15,154.17]