Before the Amplifier is a manufacturer of guitars. The company sells acoustic an
ID: 2333893 • Letter: B
Question
Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit product costs.
Activity Cost Driver Cost
Assembly DL hours logged $500
Machining Machine hours logged $1,500
Setting Up Equipment Number of setups $1,200
Product Movement Number of Moves $800
Each Acoustic guitar requires 1 direct labor hour and 0.5 machine hours to produce. Each Electric guitar requires 0.8 direct labor hours and 0.4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during production in groups of 20 guitars; Electric guitars are moved during production is groups of 25 guitars.
The direct material cost per Acoustic guitar is $60 and the direct material cost per Electric guitar is $70. Direct Laborers are paid at a rate of $25 per hour. The projected production levels for the period are 20 Acoustic guitars and 100 Electric guitars.
The total per unit cost of the acoustic line under the traditional (current) system is . . . . . . . . . . . . . .
The total per unit cost for the electric line under the activity based costing (proposed) system is . . . . . . . (round to the nearest dollar)
The total amount by which each product line is over/undercosted is . . . . . . . . . . .
Explanation / Answer
Solution:
The total cost per unit of the acoustic line under the traditional system:
Total cost per unit –
Total cost per unit:
Direct materials
$60
Direct labor
$25
($25 per hour x 1 direct labor hour)
MOH
$40
(applied based on direct labor hour)
Total cost per unit:
$125
Electric cost per unit -
Direct material
$70
Direct labor
$20
($25 x 0.8 DL hours)
MOH
$32
($40 x 0.8 DL hours)
Total cost
$122
Note – Manufacturing overhead is applied on the basis of direct labor hour.
Total manufacturing overhead –
Assembly $500
Machining $1,500
Setting up Equipment $1,200
Product Movement $800
Total MOH $4,000
Total direct labor hours 100
MOH per DL hour $4,000/100 = $40 per DL hour
Computation of ABC cost per unit:
Acoustic Guitar –
Direct material $60
Direct labor $25
MOH $58
Total cost per unit $143
Acoustic - total MOH per unit under ABC System
Cost pool
cost per activity
usage
Cost per unit
Assembly
$5 per DL hour
1 hour per unit
$5 per unit
Machining
$30 per MH
0.5 MH per unit
$15 per unit
Setting up
$150 per setup
5 units per setup
$30 per unit
Product movement
$160 per group
20 units per group
$8 per unit
Total MOH per unit
$58 per unit
Electric Guitar –
Direct material $70
Direct labor $20
MOH $28.40
Total cost per unit $118.40
Total cost per unit rounded to nearest dollar value = $118
Electric Guitar - Total MOH per unit
Cost pool
cost per activity
usage
Cost per unit
Assembly
$5 per DL hour
0.8 DL hours
$4 per unit
$5 x 0.8
Machining
$30 per MH
0.4 MH per unit
$12 per unit
$30 x 0.4
Setting up
$150 per setup
25 units per setup
$6 per set
$150/25
Product movement
$160 per group
25 units per group
$6.40
$160/25
Total cost per unit:
$28.40
Basic Calculations – ABC system
Activity
Cost Driver
Cost Pool
Acoustic Guitar
Electric Guitar
Total Activity
Cost per activity
Assembly
DL hours
$500
20 DL Hours
80 DL Hours
100 DL Hours
$5 per DL hour
Machining
Machine hours
$1,500
10 MH
40 MH
50 MH
$30 per MH
Setting Up Equipment
Number of setups
$1,200
4 setups
4 setups
8 setups
$150 per setup
Product Movement
Number of moves
$800
1 group
4 group
5 groups
$160 per group
Comparison of total cost per unit of both acoustic and electric guitars under Traditional and ABC costing methods:
Acoustic Guitar –
Traditional cost per unit $125
ABC cost per unit $143
Product undercosted $18
Hence, acoustic guitar is under costed by $18 per unit.
Total undercosted = 20 guitars x $18 per guitar = $360
Electric Guitar –
Traditional cost per unit $122
ABC cost per unit $118
Product overcosted $4
Hence, electric guitar is overcosted by $4 per unit.
Total overcosted = 100 guitars x $4 per guitar = $400
Total cost per unit:
Direct materials
$60
Direct labor
$25
($25 per hour x 1 direct labor hour)
MOH
$40
(applied based on direct labor hour)
Total cost per unit:
$125
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