Boulware Products produces printers for wholesale distributors. It has just comp
ID: 2442082 • Letter: B
Question
Boulware Products produces printers for wholesale distributors. It has just completed packaging in order from Shawl Company for 450 printers. Before the order is shipped, the controller wants to compare the unit costs computed under the company's new acting-based costing system with the unit-costs computed under its traditional costing system. Boulware's traditional costing system assigned overhead costs at a rate of 240 percent of direct labor costs.
Data for the Shawl order are as follows: direct materials, $17,552; purchased parts, $14,856; direct labor hours 140; and avg directo labor pay rate per hour $17.
Data for activity-based costing related to processing direct materials and purchased parts for the Shawl order as are as follows:
Activity Cost Driver Activity Cost Rate Activity Usage
Engineering Sytem Engineering $28/per engineering/hr 18 engineering/hr
Design
Setup Number of $36 per setup 12 setups
setups
Parts Production Machine hrs $37 per machine hr 82 machine hos
Product Assembly Assembly hrs 442 per assembly 96 assembly hours
Packaging Number of $5.60 per package 150 packages
packages
Building Machine $10 per machine hr 82 machine hrs
Occupancy hrs
1. Use the traditional costing approach to compute the total cost and the product unit cost of the Shawl order.
2. Using the cost heirarchy, identify each activity as unit level, batch level, product level, or facility level.
3. Prepare a bill of activities for the activity costs.
4. Use ABC to compute the total cost and product unit cost of the Shawl order.
5. What is the difference between the product unit cost you computed using the traditional approach and the one you computed using ABC? Does the use of ABC guarantee cost reduction for every order?
Explanation / Answer
1. Use the traditional costing approach to compute the total cost and the product unit cost of the Shawl order.
Total Cost
Direct Materials $17,552
Direct labors 140hrs. x $17 $2,380
Parts $14,856
Overhead cost $2,380 x 280% $5,712
Total cost $40,500
Number of Printers 450
Cost per unit ($40,500 / 450) $90.00
2. Using the cost heirarchy, identify each activity as unit level, batch level, product level, or facility level.
Engineering design Product level
Setup Batch Setup
Parts Production
Product Assembly Unit level
Packaging Unit level
Building Machine Facility level
3. Prepare a bill of activities for the activity costs.
Engineering ($28 x 18 hrs.) $504
Machine setups ($36 x 12) $432
Parts production ($37 x 82) $3,034
Product Assembly ($42 x $96) $4,032
Packaging ($5.60 x 150) $840
Building Occupancy ($10 x 82) $820
$5,630
4. Use ABC to compute the total cost and product unit cost of the Shawl order.
Direct Materials $17,552
Direct labors $2,380
Parts $14,856
Overhead activities cost
Engineering ($28 x 18 hrs.) $504
Machine setups ($36 x 12) $432
Parts production ($37 x 82) $3,034
Product Assembly ($42 x $96) $4,032
Packaging ($5.60 x 150) $840
Building Occupancy ($10 x 82) $820
$44,450
Number of Printers 450
Cost per unit ($44,450 / 450) $98.77
5. What is the difference between the product unit cost you computed using the traditional approach and the one you computed using ABC? Does the use of ABC guarantee cost reduction for every order?
Unit cost under Tradition approach $90.00
Unit cost under ABC approach $98.77
Difference $8.77
=======
Unit cost under ABC approach is more by $8.77 ($98.77 - $90.00) than unit cost under traditional approach.
Does the use of ABC guarantee cost reduction for every order?
ABC directly assigns costs to activities, it can be an extremely useful tool for anyone involved in process improvement and cost reduction programmes. Using ABC means that all the individual activities that are part of a process can be accurately costed.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.