Thompson Products manufactures two products. Financial and Managerial The compan
ID: 2419443 • Letter: T
Question
Thompson Products manufactures two products. Financial and Managerial The company believes that its existing costing system, which allocates MOH based on machine hours, may be cross-subsidizing the costs of its products Joel Thompson. CFO and Controller of Thompson Products, is considering an ABC system, in order to implement ABC. Thompson has identified four activities routinely performed in the factory, as well as the total yearly MOH costs and cost drivers associated with those activities. Thompson's only products are Financial and Managerial Total yearly costs, activity levels, and production levels for the two products are as follows: If Thompson uses ABC. what it the total amount of MOH allocated to Financial each year? How much is allocated to Managerial? Clearly show all work. 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 overcosted or undercosted and by how much in total? Was Managerial being overcosted or undercosted and by how much in total? list 3 signs that Thompson could have seen to let him know that an ABC system might be more appropriate for his company than a traditional costing system.Explanation / Answer
Answer to Part A:
Calculation of total amount of MOH allocated to Financial and Managerial each year:
Activity
MOH Cost
Cost Driver
Ratio
Financial
Managerial
Material Handling
$4000
Parts
14:18
1750
((4000/32)*14)
2250
((4000/32)*18)
Machining
$9000
Machine hours
1:2
3000
((9000/3)*1)
6000
((9000/3)*2)
Assembly
$4160
Units Produced
7:6
2240
((4160/13)*7)
1920
((4160/13)*6)
Inspection
$3200
Units Inspected
6:2
2400
((3200/8)*6)
800
((3200/8)*2)
Total MOH
20360
9390
10970
Answer to Part B:
Per Unit Cost OF Financial and Managerial:
Particulars
Financial
Managerial
Traditional
ABC
Traditional
ABC
DM Costs
$5000
$5000
$7610
$7610
DL Costs
$18000
$18000
$24000
$24000
MOH Costs
$6787 ((20360/3)*1)
$9390
$13573
((20360/3)*2)
$10970
Total Cost
$29787
$32390
$45183
$42580
Units Produced
700
700
600
600
Per Unit Cost
$42.55
$46.27
$75.305
$$70.97
Financial has been undercosted by $2603 ($32390 - $29787) and Managerial has been overcosted by $2603 ($45183 - 42580).
Answer to Part C:
ABC system is more appropriate than Traditional System:
Activity
MOH Cost
Cost Driver
Ratio
Financial
Managerial
Material Handling
$4000
Parts
14:18
1750
((4000/32)*14)
2250
((4000/32)*18)
Machining
$9000
Machine hours
1:2
3000
((9000/3)*1)
6000
((9000/3)*2)
Assembly
$4160
Units Produced
7:6
2240
((4160/13)*7)
1920
((4160/13)*6)
Inspection
$3200
Units Inspected
6:2
2400
((3200/8)*6)
800
((3200/8)*2)
Total MOH
20360
9390
10970
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