Brilliant Accents Company manufactures and sells three styles of kitchen faucets
ID: 2350094 • Letter: B
Question
Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply: BRASS CHROME WHITE Projected sales in units 30,000 50,000 40,000 PER UNIT data: Selling price $40 $20 $30 Direct materials $ 8 $ 4 $ 8 Direct labor $15 $ 3 $ 9 Overhead cost based on direct labor hours (traditional system) $12 $ 3 $ 9 Hours per 1000-unit batch: Direct labor hours 40 10 30 Machine hours 25 25 10 Setup hours 1.0 0.5 1.0 Inspection hours 30 20 20 Total overhead costs and activity levels for the year are estimated as follows: Activity Overhead costs Activity levels Direct labor hours 2,900 hours Machine hours 2,400 hours Setups $465,500 95 setup hours Inspections $405,000 2,700 inspection hours $870,500 Required: a. Using the traditional system, determine the operating profit per unit for the brass style of faucet. b. Determine the activity-cost-driver rate for setup costs and inspection costs. c. Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?Explanation / Answer
a. Using the traditional system, determine the operating profit per unit for the brass style of faucet
. b. Determine the activity-cost-driver rate for setup costs and inspection costs.
c. Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit
. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
a. Traditional system:
Operating profit per unit for Brass faucets = $5 = $40 ($8 + 15 + 12).
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b. c. The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2700.
ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit.
30,000 units in projected sales / 1000 units per batch = 30 batches;
=30 batches x 1 setup hour per batch = 30 setup hours;
=30 batches x 30 inspection hours per batch = 900 inspection hours.
=30 setup hours x $4,900 = $147,000/30,000 units = $4.90/unit
=900 inspection hours x $150 = $135,000/30,000 units = $4.50/unit
Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit.
Operating profit per unit for Brass faucets is $7.60 = $40 ($8 + 15 +9.40).
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d. ABC system: Operating profit per unit for Brass faucets is $5.00.
Operating profit per unit for Brass faucets is $7.60.
Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours,
the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours.
The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.
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