Question

Fairbanks Corporation produces two types of cell phone electronic chargers: wall chargers and car chargers. The current traditional costing system allocates overhead costs using a plant-wide overhead rate based on direct labor hours. Since the two products are similar but require different parts and processes, the company controller believes that it might make sense to employ activity-based costing in order to get a better application of overhead expenses to the products produced. Production expectations for 2017 are 17,000 wall chargers and 15,200 car chargers. The wall chargers take .5 hours to produce. The car chargers take .75 hours to produce. The direct material and direct labor costs included in the two products are as follows: Wall chargers use $3.75 of direct material per unit and $9.50 per hour of direct labor. Car chargers use $4.15 of direct material per unit and $9.50 per hour of direct labor. Each charger sells for $23.00. Budgeted Total Factory Overhead for 2017: Activity Est. OH Cost Est. Volume Levels Production setup $8,500 20 setups Materials handling $62,000 4,500 lbs. Packaging and shipping $120,000 6,400 boxes Total factory overhead $190,500 Fairbanks’ controller worked with the operations group to analyze the three overhead activities in order to effectuate activity-based costing. The estimates related to the two products’ requirements were: Activity Wall Charger Car Charger Production setup 35% 65% Materials handling 60% 40% Packaging and shipping 55% 45% From the cost information provided, provide responses in Microsoft Excel to the following questions. Reference Lynda.com in the CSU-Global Library (Links to an external site.) for Microsoft Excel tutorials or use the Excel Tutorials link found in the classroom if assistance is needed. Compare the net profit margin of the products under the simple/traditional cost assignment and the ABC assignment for each product. Evaluate the difference. that the controller might deliver to management to justify the use of ABC for these two products.

Answer 1

Calculation under traditional method

		Traditional method
		Wall Chargers		Car chargers
A	D.mat	3.75		4.15
B	D.lab	4.75	(0.5 hr*9.50)	7.125	(0.75 hr*9.50)
	Factory OH
	Budgetd rate	9.57		9.57
	*hour per unit	0.5		0.75
C	Budgeted OH	4.785		7.1775
A+B+C	Total cost per unit	13.285		18.4525
	S.P	$           23.00		$        23.00
	Profit margin per unit	$             9.72		$           4.55
	* Expected production	17,000		15,200
	Profit margin	$      165,155		$      69,122

Total OH	190,500
Total lab hours	19,900
Budgeted rate	9.57

	Expected production	Hour per unit	Total hours required
Wall chargers	17,000	0.5	8,500
Car chargers	15,200	0.75	11,400
			19,900

Under ABC method

	ABC method
	Wall Chargers		Car chargers
D.mat	$          3.75		$      4.15
D.lab	$          4.75	(0.5 hr*9.50)	$      7.13	(0.75 hr*9.50)
Factory OH	$          6.25		$      5.55
Total cost per unit	$       14.75		$   16.82
S.P	$       23.00		$   23.00
Profit margin per unit	$          8.25		$      6.18
* Expected production	17,000		15,200
Profit margin	$   140,325		$ 93,895

				Total OH attributable
Activity	Cost pool	Wall charger %	Car charger %	Wall charger	Car charger
Production setup	$         8,500	35%	65%	$          2,975	$        5,525
Materials handling	$       62,000	60%	40%	$        37,200	$      24,800
Packaging and shipping	$     120,000	55%	45%	$        66,000	$      54,000
			Total OH	$     106,175	$     84,325
			Expected production	17,000	15,200
			OH per unit	6.25	5.55

Difference between two is clearly evident that

ABC method gives absolue true and correct picture of net profit margins and helps in better decision making so company should follow ABC calculation basis while decision making