Hello, I have a probelm here and I also have the model solutions, but I have tro
ID: 2493592 • Letter: H
Question
Hello, I have a probelm here and I also have the model solutions, but I have trouble understanding point 3, I don't know where the numbers are coming from. If anybody could explain please, it will be great. Thanks a lot for your help.
Please find below the problem
Kitchen King’s Singapore plant manufactures three product lines, all multi-burner ceramic
cooktops. The plant’s three product models are the Regular (REG), the Advanced (ADV)
and the Gourmet (GMT). Until recently, the plant used a job costing system, with
manufacturing overhead applied on the basis of direct labour hours. The following table
displays the basic data upon which the conventional costing system was based.
Planned annual production
REG
ADV
GMT
Volume in units
5000
4000
1000
Production runs
40 runs of 125 units
40 runs of 100 units
20 runs of 50 units
Direct material
$129
$151
$203
Direct labour (not including setup)
$171 (9 hrs @ $19
per hr)
$209 (11 hrs @ $19
per hr)
$247 (13 hrs @ $19
per hr)
Machine hours (MH) per product unit
10 MH
12 MH
17 MH
Total machine hours consumed by product
line in a year
50 000 (10 MH ×
5000)
48 000 (12 MH ×
4000)
17 000 (17 MH ×
1000)
The annual budgeted overhead is $1 224 000 and the company’s predetermined
overhead rate is $12 per direct labour hour. The product costs for the three product
models, as reported under the plant’s traditional costing system, are shown in the
following table:
REG
ADV
GMT
Direct material
$129
$151
$203
Direct labour (not including setup
time)
$171
$209
$247
Manufacturing overhead
$108 (9 hrs @ $12
per hr)
$132 (11 hrs @ $12
per hr)
$156 (13 hrs @ $12
per hr)
Total
$408
$492
$606
Kitchen King’s pricing policy is to set a target price for each product equal to 130 per
cent of the full product cost. Due to price competition from other appliance manufacturers,
REG units were selling at $525 and ADV units were selling for $628. These prices were
somewhat below the firm’s target prices. However, these results were partially offset by
great-than-expected profits on the GMT product line. Management had raised the price on
the GMT model to $800 which was higher than the original target price. Even at this price,
Kitchen King’s customers did not seem to hesitate to place orders. Moreover, the
company’s competitors did not mount a challenge in the market for the GMT product line.
Nevertheless, concern continued to mount in Singapore about the difficulty in the REG and
ADV markets. After all, these were the plant’s bread-and-butter products, with projected
annual sales of 5000 REG units and 4000 ADV units.
Kitchen King’s director of cost management, Angela Hui, had been thinking for some
time about a refinement in the Singapore plant’s product costing system. Hui wondered if
the conventional volume-based system was providing management with accurate data
about product costs. She had read about activity-based costing and wondered if ABC
would be an improvement to the plant’s product costing system. After some discussion, an
ABC proposal was made to the company’s top management and approval was obtained.
The data collected for the new ABC system is displayed in the following table.
Activity
Activity cost
Activity driver
Product line
Quantity of activity driver
Machine related
$310 500
Machine hours
REG
ADV
GMT
Total
50 000
48 000
17 000
115 000
Material handling
52.500
Production runs
REG
ADV
GMT
Total
40
40
20
100
Purchasing
75 000
Purchase orders
REG
ADV
GMT
Total
1.0
96
104
300
Setup
85 000
Production runs
REG
ADV
GMT
Total
40
40
20
100
Inspection
27.500
Inspection hours
REG
ADV
GMT
Total
4.0
4.0
300
1 100
Shipping
66 000
Shipments
REG
ADV
GMT
Total
5.0
4.0
200
1 100
Engineering
32.500
Engineering hours
REG
ADV
GMT
Total
250
2.0
200
650
Facility
575 000
Machine hours
REG
ADV
GMT
Total
50 000
48 000
17 000
115 000
Required:
1. Show how the company’s overhead rate of $12 per direct labour hour was
calculated.
2. Complete an activity-based costing analysis for Kitchen King’s three product lines.
3. Prepare a table which estimates the new product cost for each product line under ABC.
Planned annual production
REG
ADV
GMT
Volume in units
5000
4000
1000
Production runs
40 runs of 125 units
40 runs of 100 units
20 runs of 50 units
Direct material
$129
$151
$203
Direct labour (not including setup)
$171 (9 hrs @ $19
per hr)
$209 (11 hrs @ $19
per hr)
$247 (13 hrs @ $19
per hr)
Machine hours (MH) per product unit
10 MH
12 MH
17 MH
Total machine hours consumed by product
line in a year
50 000 (10 MH ×
5000)
48 000 (12 MH ×
4000)
17 000 (17 MH ×
1000)
Explanation / Answer
Answer 1 Calculation of Company's overhead rate of $12 per direct labour hour Product REG ADV GMT Total Volume in units 5000 4000 1000 Direct labour per unit 9 11 13 Total Direct Labour hours 45000 44000 13000 102000 Annual Budgeted overhead = $1224000 Predetermined Overhead rate = Annual Budgeted overhead / Total Direct Labour hours = $1224000 / 102000 hours = $12 per direct labour hour Answer 2 Calculation of activity rate Activity Activity Cost Total Quantity of activity driver Activity Rate Activity Driver A B A / B Machine related $3,10,500.00 115000 $2.70 per machine hour Material handling $52,500.00 100 $525.00 per production run Purchasing $75,000.00 300 $250.00 per purchase order Setup $85,000.00 100 $850.00 per production run Inspection $27,500.00 1100 $25.00 per inspection hour Shipping $66,000.00 1100 $60.00 per shipment Engineering $32,500.00 650 $50.00 per engineering hour Facility $5,75,000.00 115000 $5.00 per machine hour Allocation of overhead cost based on activity rate Product REG ADV GMT Total Machine related $1,35,000.00 $1,29,600.00 $45,900.00 $3,10,500.00 Material handling $21,000.00 $21,000.00 $10,500.00 $52,500.00 Purchasing $25,000.00 $24,000.00 $26,000.00 $75,000.00 Setup $34,000.00 $34,000.00 $17,000.00 $85,000.00 Inspection $10,000.00 $10,000.00 $7,500.00 $27,500.00 Shipping $30,000.00 $24,000.00 $12,000.00 $66,000.00 Engineering $12,500.00 $10,000.00 $10,000.00 $32,500.00 Facility $2,50,000.00 $2,40,000.00 $85,000.00 $5,75,000.00 Total $5,17,500.00 $4,92,600.00 $2,13,900.00 $12,24,000.00 Answer 3 Calculation of new product cost for each product Line under ABC Product REG ADV GMT Volume in units 5000 4000 1000 Direct Material $6,45,000.00 $6,04,000.00 $2,03,000.00 Direct Labour $8,55,000.00 $8,36,000.00 $2,47,000.00 Overhead based on ABC $5,17,500.00 $4,92,600.00 $2,13,900.00 Total Cost $20,17,500.00 $19,32,600.00 $6,63,900.00 Cost per unit $403.50 $483.15 $663.90
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