Product A Product B $27 per unit Direct materials Direct labor hours Machine hou

Question

Product A Product B $27 per unit Direct materials Direct labor hours Machine hours Batches Volume Engineering modifications Number of customers Market price $14 per unit 0.3 DLH per unit 0.2 MH per unit 120 batches 10,000 units 10 modifications 500 customers 1.6 DLH per unit 1.2 MH per unit 240 batches 2,000 units 50 modifications 400 customers $36 per unit $95 per unit The company's direct labor rate is $20 per direct labor hour (DLH) Additional information follows Costs Driver Indirect manufacturing Engineering support Electricity Setup costs 22,000 Engineering modifications 17,600 Machine hours 2,000 Batches Nonmanufacturing Customer service 73,000 Number of customers

Explanation / Answer

Answer

Answer 5 Activity based costing gives better information than the plantwide rate based on volume-related measures because ABC associates the cost of the various activities that must be performed in order to make, sell, and provide services to customers.

1.1 Particulars Product A Product B Total Direct Labour Hours Product A 10000 units*0.3 DLH per unit 3000 3000 Direct Labour Hours Product A 2000 units*1.6 DLH per unit 3200 3200 Total Direct Labur Hours 3000 3200 6200 Plantwide rate Engineering support 22000 Electricity 17600 Setup costs 42000 Total manufacturing overhead 81600 Direct Labour Hours 6200 Overhead rate (Per DLH) 81600/6200 13.16 Particulars Product A Product B Direct materials per unit 14 27 Direct labor per unit A: 0.3 DLH/unit @ $20/DLH 6 B: 1.6 DLH/unit @ $20/DLH 32 Manufacturing overhead per unit A: 0.3 DLH/unit @ $13.16/DLH 3.95 B: 1.6 DLH/unit @ $13.16/DLH 21.06 Total manufacturing cost per unit 23.95 80.06 1.2 Particulars Product A Product B Selling price per unit 36 95 Manufacturing cost per unit 23.95 80.06 Gross margin per unit 12.05 14.94 2.1 Gross margin per unit 12.05 14.94 x Units purchased per customer A: 10,000 units/500 customers 20 B: 2,000 units/400 customers 5 Gross margin per customer 241 74.7 2.2 Total customer service cost 73000 Number of customers (500+400) 900 Customer service cost per customer (73000/900) 81.11 Gross margin per customer 241 74.7 Customer service cost per customer 81.11 81.11 Profit/(Loss) per customer 159.89 -6.41 Is the Profit Adequate Yes No 3.1 Activity Budgeted Activity Cost Budgeted Activity Level Cost Driver Activity Cost per Cost Driver Engineering Support (10+50) 22000 60 Engineering Modification 366.67 Electricity (0.2*10000) + (1.2*2000) 17600 4400 Machine Hours 4.00 Setup (120+240) 42000 360 Batches 116.67 Particulars Product A Product B Engineering support A: 10 modifications @ $366.67 3666.7 B: 50 modifications @ $366.67 18333.50 Electricity A: 2,000 MH @ $4/MH 8000 B: 2,400 MH@ $4/MH 9600 Setups A: 120 batches @ $116.67/batch 14000 B: 240 batches @ $116.67/batch 28000 Total overhead cost 25666.7 55933.5 Number of units 10000 2000 Overhead cost per unit (rounded) 2.57 27.97 Direct materials cost per unit 14 27 Direct labor cost per unit (part 1) 6 32 Total manufacturing cost per unit 22.57 86.97 3.2 Selling price per unit 36 95 Total manufacturing cost per unit 22.57 86.97 Gross profit per unit 13.43 8.03 4.1 Gross profit per unit 13.43 8.03 x units per customer 20 5 Gross profit per customer 268.6 40.15 4.2 Gross profit per customer 268.6 40.15 Service cost per customer 81.11 81.11 Profit (loss) per customer 187.49 -40.96 Is the Profit Adequate Yes No

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