Volume-Based Costing versus ABC ?Eastern Chemical Company produces three product
ID: 2419736 • 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.
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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
1. Manufacturing cost per unit using the volume-based method
Target price is 150% of manufacturing cost
Product A Manufacturing cost = 285.5/150% = 190.33
Product B Manufacturing cost = 297.6/150%= 198.4
Product C manufacturing cost = 202.5/150%= 135
2. least profitable and the most profitable product under both the current and the ABC costing systems
Cost per Factory overheads as per ABC System
setups= 9000/(2+5+3)= 900
weight of direct materials= 110000/(400+250+350)= 110
Waste and hazardous disposals= 250000/(25+45+30) = 2500
Quality inspection = 75000/(30+35+35) = 750
Utilities = 66000/(2000+7000+1000)= 6.6
Product A Product B Product C
Setup cost 2*900=1800 4500 2700
weight of direct mat. 400*110= 44000 27500 38500
Waste and hazardous 25*2500=62500 112500 75000
Quality inspection 30*750=22500 26250 26250
utilities 2000*6.6=13200 46200 6600
Total 144000 216950 149050
No. of units 1000 5000 500
Factory o/h p.u 144 43.39 298.1
Prime cost 70 126.4 75
Total cost as per ABC 214 169.79 373.1
Selling price 286 255.6 310
profit 72 85.81 (63.1)
Under ABC B is most profitable
Selling price 286 255.6 310
cost as per current method 190.33 198.4 135
Profit 95.67 57.2 175
Under current method C is most profitable
3. new target price for each product based on 150% of the new costs under the ABC system
Total cost as per ABC 214 169.79 373.1
Target price(150%) 321 254.685 559.65
Selling price 286 255.6 310
Difference (35) 1 (249.65)
4. The company should stop product c as most of the factory overheads are incurred on it. The company should promote product A & B
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