ABC problem Tough Thermos, Inc. manufactures two plastic thermos containers. The
ID: 2423363 • Letter: A
Question
ABC problem
Tough Thermos, Inc. manufactures two plastic thermos containers. The large container is called the Ice House. The smaller container is called the Cool Chest. The Ice House sells for $35 and the Cool Chest sells for $24. The production costs computed per unit under traditional costing for each model in 2008 were as follows.
Traditional Costing
Ice House
Cool Chest
Direct materials
$ 9.50
$ 6.00
Direct labor ($10 per hour)
8.00
5.00
Manufacturing overhead ($17.08 per DLH)
13.66
8.54
Total per unit cost
$31.16
$19.54
In 2008, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labor hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labor hours (50,000) for the 2 models.
Under traditional costing, the gross profit on the two containers was: Ice House $3.84 or ($35 $31.16), and Cool Chest $4.46 or ($24 $19.54). Because of this difference, management is considering phasing out the Ice House model and increasing production of the Cool Chest Model.
Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activity-based costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2008.
Activities
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
Activity-Based Overhead Rate
Purchasing
Number of orders
$179,000
4,475 purchase orders
$40 per order
Machine setups
Number of setups
$195,000
780 setups
$250 per setup
Extruding
Machine hours
$ 320,000
80,000 machine hours
$4 per machine hour
Quality control
Tests and inspections
$ 160,000
8,000 tests
$20 per test
The cost drivers used for each product were:
Cost Drivers
Ice House
Cool Chest
Total
Purchase orders
2,500
1,975
4,475
Machine setups
480
300
780
Machine hours
60,000
20,000
80,000
Tests and inspections
5,000
3,000
8,000
1. Assign the total 2008 manufacturing overhead to the two products using activity based costing. Show calculations.
2. What was the total cost per unit and the gross profit per unit of each moel using ABC costing? Show calculations.
3. Are managment's future plans for the two models sound?
Tough Thermos, Inc. manufactures two plastic thermos containers. The large container is called the Ice House. The smaller container is called the Cool Chest. The Ice House sells for $35 and the Cool Chest sells for $24. The production costs computed per unit under traditional costing for each model in 2008 were as follows.
Traditional Costing
Ice House
Cool Chest
Direct materials
$ 9.50
$ 6.00
Direct labor ($10 per hour)
8.00
5.00
Manufacturing overhead ($17.08 per DLH)
13.66
8.54
Total per unit cost
$31.16
$19.54
In 2008, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labor hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labor hours (50,000) for the 2 models.
Under traditional costing, the gross profit on the two containers was: Ice House $3.84 or ($35 $31.16), and Cool Chest $4.46 or ($24 $19.54). Because of this difference, management is considering phasing out the Ice House model and increasing production of the Cool Chest Model.
Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activity-based costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2008.
Activities
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
Activity-Based Overhead Rate
Purchasing
Number of orders
$179,000
4,475 purchase orders
$40 per order
Machine setups
Number of setups
$195,000
780 setups
$250 per setup
Extruding
Machine hours
$ 320,000
80,000 machine hours
$4 per machine hour
Quality control
Tests and inspections
$ 160,000
8,000 tests
$20 per test
The cost drivers used for each product were:
Cost Drivers
Ice House
Cool Chest
Total
Purchase orders
2,500
1,975
4,475
Machine setups
480
300
780
Machine hours
60,000
20,000
80,000
Tests and inspections
5,000
3,000
8,000
Explanation / Answer
1)Assign cost
Unit cost
3)No they are not sound
Ice house Cool chest Purchase order @40 2500*40= 100,000 1475*40= 59,000 Machine setup@250 480*250=120,000 300*250=75,000 Machine hours @4 60,000*4=240,000 20,000*4=80,000 inspection @20 5,000*20=100,000 300*20= 60,000 Total cost $560,000 $274,000 Units 50,000 20,000 Cost per unit $11.20 $13.70Related Questions
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