Kinnard Electronics manufactures two home theater systems: the Elite which sells
ID: 2425780 • Letter: K
Question
Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2012 was as follows.
Traditional Costing
Elite
Preferred
Direct materials
$600
$320
Direct labor ($20 per hour)
100
80
Manufacturing overhead ($35 per DLH)
175
140
Total per unit cost
$875
$540
In 2012, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 _ $875), and Preferred $560 ($1,100 _ $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the Preferred model. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012.
Expected
Activity-
Use of
Based
Estimated
Cost
Overhead
Activity
Cost Driver
Overhead
Drivers
Rate
Purchasing
Number of orders
$ 775,000
25,000
$31
Machine setups
Number of setups
580,000
20,000
29
Machining
Machine hours
3,100,000
100,000
31
Quality control
Number of inspections
445,000
5,000
89
The cost drivers used for each product were:
Cost Driver
Elite
Preferred
Total
Purchase orders
11,250
13,750
25,000
Machine setups
11,000
9,000
20,000
Machine hours
40,000
60,000
100,000
Inspections
2,750
2,250
5,000
Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound? Explain.
Traditional Costing
Elite
Preferred
Direct materials
$600
$320
Direct labor ($20 per hour)
100
80
Manufacturing overhead ($35 per DLH)
175
140
Total per unit cost
$875
$540
Explanation / Answer
Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2012 was as follows.
Traditional Costing
Elite
Preferred
Direct materials
$600
$320
Direct labor ($20 per hour)
100
80
Manufacturing overhead ($35 per DLH)
175
140
Total per unit cost
$875
$540
In 2012, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 _ $875), and Preferred $560 ($1,100 _ $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the Preferred model. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012.
Expected
Activity-
Use of
Based
Estimated
Cost
Overhead
Activity
Cost Driver
Overhead
Drivers
Rate
Purchasing
Number of orders
$ 775,000
25,000
$31
Machine setups
Number of setups
580,000
20,000
29
Machining
Machine hours
3,100,000
100,000
31
Quality control
Number of inspections
445,000
5,000
89
The cost drivers used for each product were:
Cost Driver
Elite
Preferred
Total
Purchase orders
11,250
13,750
25,000
Machine setups
11,000
9,000
20,000
Machine hours
40,000
60,000
100,000
Inspections
2,750
2,250
5,000
Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound? Explain.
The allocation of total manufacturing overhead using activity-basedcosting is as follows:
Management’s future plans for the two models are not sound.Under ABC costing, the elite model is $167 per unit more profitable than the preferred model.
Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2012 was as follows.
Traditional Costing
Elite
Preferred
Direct materials
$600
$320
Direct labor ($20 per hour)
100
80
Manufacturing overhead ($35 per DLH)
175
140
Total per unit cost
$875
$540
In 2012, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 _ $875), and Preferred $560 ($1,100 _ $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the Preferred model. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012.
Expected
Activity-
Use of
Based
Estimated
Cost
Overhead
Activity
Cost Driver
Overhead
Drivers
Rate
Purchasing
Number of orders
$ 775,000
25,000
$31
Machine setups
Number of setups
580,000
20,000
29
Machining
Machine hours
3,100,000
100,000
31
Quality control
Number of inspections
445,000
5,000
89
The cost drivers used for each product were:
Cost Driver
Elite
Preferred
Total
Purchase orders
11,250
13,750
25,000
Machine setups
11,000
9,000
20,000
Machine hours
40,000
60,000
100,000
Inspections
2,750
2,250
5,000
Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound? Explain.
The allocation of total manufacturing overhead using activity-basedcosting is as follows:
Elite Preferred Overhead rate Number Cost Number Cost Total Cost Purchasing $31 11,250 $348,750 13,750 $426,250 $775,000 Machine Setup $29 11,000 $319,000 9,000 $261,000 $580,000 Machine Hours $31 40,000 $1,240,000 60,000 $1,860,000 $3,100,000 Inspections $89 2,750 $244,750 2,250 $200,250 $445,000 Total assigned costs (a) $2,152,500 $2,747,500 $4,900,000 Units produced(b) 20,000 10,000 Costs per unit (a) ÷ (b) $108 $275 b.The cost per unit and gross profit of each model under ABC costing Elite Preferred Direct Material $600 $320 Direct Labour $100 $80 Manufacturing overhead $108 $275 Total cost per unit $808 $675 Sales price per unit $1,400 $1,100 Less:Costs per unit ($808) ($675) Gross profit $592 $425 $167 c.Management’s future plans for the two models are not sound.Under ABC costing, the elite model is $167 per unit more profitable than the preferred model.
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