Thompson products manufactures two products, financial and managerial. The compa
ID: 2419347 • Letter: T
Question
Thompson products manufactures two products, financial and managerial. The company believes that its existing cost system, which allocates manufacturing overhead based on machine hours, may be cross subsidizing the cost of its products. Joel Thompson, CFO and Controller of Thompson products, is considering an activity based costing system. In order to implement activity based costing, Thompson has identified four activities routinely performed in the factory, as well as the total yearly manufacturing overhead costs and cost drivers associated with those activities.
Activity
Manufacturing overhead Costs
Cost Drivers
Material Handling
$4,000
# of parts
Machining
$9,000
# number of machine hours
Assembly
$4,160
# of units produced
Inspection
$3,200
# of units inspected
Thompson's only products are financial and managerial. Total yearly costs, activity levels, and production levels for the two products are as followed:
Financial
Managerial
Direct Material Cost
$5,000
$7,610
Direct Labor Cost
$18,000
$24,000
# parts
1,400
1,800
# machine hours
100
200
# units produced
700
600
# units inspected
600
200
A. Assume the ABC system yields a more accurate product cost. What was the per unit cost distortion present in the traditional system for financial and managerial? Was financial being over costed and by how much in total? Was managerial being over costed or under costed and by how much in total?
Activity
Manufacturing overhead Costs
Cost Drivers
Material Handling
$4,000
# of parts
Machining
$9,000
# number of machine hours
Assembly
$4,160
# of units produced
Inspection
$3,200
# of units inspected
Explanation / Answer
Traditional system:
Total manufacturing overhead costs = $ 20,360
Total machine hours = 300
Therefore absorption rate = 20,360 / 300 = $ 67.87 per machine hour
Sice the financial product consumes 100 machine hours, ovehead cost allocated is $ 6,787
Since the managerial product consumes 200 machine hours, over cost allocated is $ 13,573
Activity based costing:
Under traditional system, financial product was being undercosted by $ 3.72 per unit, and the managerial product was overcosted by $ 4.34 per unit.
Financial Managerial Direct material cost 5,000 7,610 Direct labor cost 18,000 24,000 Manufacturing overhead cost 6,787 13,573 Total manufacturing cost 29,787 45,183 Units produced 700 600 Manufacturing cost per unit $ 42.55 $75.31Related Questions
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