Volume-Based Costing versus ABC ?Eastern Chemical Company produces three product
ID: 2419406 • Letter: V
Question
Volume-Based Costing versus ABC?Eastern Chemical Company produces three products. The operating results of the current year are:
The firm sets the target price of each product at 150% of the product’s total manufacturing cost. Recognizing that the firm was able to sell Product C at a much higher price than the target price of the product and lost money on Product B, Tom Watson, CEO, wants to promote Product C much more aggressively and phase out Product B. He believes that the information suggests that Product C has the greatest potential among the firm’s three products since the actual selling price of Product C was almost 50% higher than the target price while the firm was forced to sell Product B at a price below the target price.
Page 161
Both the budgeted and actual factory overheads for the current year are $510,000. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are:
The controller noticed that not all products consumed factory overhead similarly. Upon further investigations, she identified the following usage of factory overhead during the year:
Required
Determine the manufacturing cost per unit for each of the products using the volume-based method.
What is the least profitable and the most profitable product under both the current and the ABC costing systems?
What is the new target price for each product based on 150% of the new costs under the ABC system? Compare this price with the actual selling price.
Comment on the result from a competitive and strategic perspective. As a manager of Eastern Chemical, describe what actions you would take based on the information provided by the activity-based unit costs.
Product Sales Quantity Target Price Actual Price Difference A 1,000 $285.50 $286.00 $1.00 B 5,000 297.60 255.60 (42.00) C 500 202.50 310.00 $107.50 Direct materials Direct labor Total prime cost Product A Product B Product C $114.40 $50.00 $65.00 20.00 12.00 10.00 $126.40 $70.00 $75.00Explanation / Answer
(i) Determination of cost per unit under volume based costing:-
under volume based costing the over heads are allocated base on a standard units
Note 1.
Allocation of Over Heads:
basis of Allocation:
Total over head cost/ Total labour dollers
Lobour doller per unit
(ii) Over head allocation based on ABC method:-
Note 2.:
Allocation of set up cost
Total Set up cost/ toal set ups * set up per produt
(i,e. 9000/10*2,5,3)
Weight of Direct Material
(i,e 110000/1000*400,250,350)
waste disposal cost
(i,e 250000/100*25,45,30)
Quality Inspection cost
(i,e 75000/100*30,35,35)
Utilities cost
(i,e 66000/10000*2000,7000,1000 )
inner calculation gives total cost, it will further diveded into No of units then we will get cost per unit that is shown in respective Product column.
(iii) Total Cost asper ABC costing:
New Target Selling Price
(i,e 150% on Cots price
Comparision of New target price and Actual Price:
286.
Observations:
based on the above analaysis Product B is the only profitable product in this business. The CEO took the over head allocation based on volume it will give reusult adversiley because of the product B volume is higher in the mix. so Most of the over head cost allocated to Product B only. But in Activity based costing the Over head utilization of Product B is low.
One more point we are observed that is cost disposal of waste and hazardus items are high in Product C.
So it is not advisabl to take the decision of vanish of product b in their Mix.
Particulars Porduct A Product B Proudct C Prime Cost 70 126 75 Over Head allocation ( See Note 1) 120 72 60 Total Cost 190 198 135Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.