Number of setups Machine hours Direct labor hours Number of orders shipped 100,0
ID: 2510406 • Letter: N
Question
Number of setups Machine hours Direct labor hours Number of orders shipped 100,000 123,900 5,000 Comment on how you would use this additional information for costing the firm's products and in straegic planning. 4. Compare the two approaches and discuss the strategic and competitive issues of using each of the methods [LO 5-1. 53 541 Volume-Based Costing versus ABC results of the current year are: 5-11 Eastem Cemical Company produces three products. The ales Quaniy Target Price Actual Price 1,000 5,000 500 $285.50 297.60 202.50 $286.00 255.60 310.00 Difference S 1.00 (42.00 $107.50 The firm sets the target price of each product at 150% of the product's total mianufacturing cos Recognizing that the firm was able to sell Product C at a much higher price than the target price of teExplanation / Answer
1. The manufacturing cost per unit for each of the products using the volume based method Product A Product B Product C Direct Materials $50 $114.40 $65 Direct Labour $20 $12 $10 Manufacturing Overheads $120 $72 $60 Cost per unit $190 $198 $135 Notes: Manufacturing overheads Product A Product B Product C Total Sales Quantity 1000 5000 500 Direct labour $20,000 $60,000 $5,000 $85,000 (Sales Quantity x labour rate per unit) Manufacturing Overhead $120,000 $360,000 $30,000 $510,000 (Total overhead/Total labour cost x Labour cost of the product) Manufacturing Overhead per unit $120 $72 $60 (Manufacturing overhead for the product/Sales Quantity of the product) 2. Costing under ABC system Product A Product B Product C Total Sales Quantity 1000 5000 500 Sales Price per unit $286 $255.60 $310 Sales Revenue (A) $286,000 $1,278,000 $155,000 $1,719,000 Direct Material (Sales quantity x cost per unit) $50,000 $572,000 $32,500 $654,500 Direct Labour (Sales quantity x cost per unit) $20,000 $60,000 $5,000 $85,000 Manufacturing Overheads: Setup costs $1,800 $4,500 $2,700 $9,000 Indirect material $44,000 $27,500 $38,500 $110,000 Disposals cost $62,500 $112,500 $75,000 $250,000 Quality inspection cost $22,500 $26,250 $26,250 $75,000 Utilities $13,200 $46,200 $6,600 $66,000 Total Cost (B) $214,000 $848,950 $186,550 $1,249,500 Profit (A-B) $72,000 $429,050 ($31,550) $469,500 Costing under Current method Product A Product B Product C Total Sales Quantity 1000 5000 500 Sales Price per unit $286 $255.60 $310 Sales Revenue (A) $286,000 $1,278,000 $155,000 $1,719,000 Direct Material (Sales quantity x cost per unit) $50,000 $572,000 $32,500 $654,500 Direct Labour (Sales quantity x cost per unit) $20,000 $60,000 $5,000 $85,000 Manufacturing Overhead $120,000 $360,000 $30,000 $510,000 Total Cost (B) $190,000 $992,000 $67,500 $1,249,500 Profit (A-B) $96,000 $286,000 $87,500 $469,500 Under both the methods, least profitable Product is Product C and the most profitable product is Product B. In ABC method, product C is making loss of $31550. Note: Manufacturing Cost Manufacturing Overheads: Product A Product B Product C Total Number of setups 2 5 3 10 Setup costs (Total cost/total setups x setups for product) $1,800 $4,500 $2,700 $9,000 Weight of direct material (pounds) 400 250 350 1000 Indirect material (110 x Pounds for the product) $44,000 $27,500 $38,500 $110,000 Waste and hazardous disposals 25 45 30 100 Disposals cost (2500 x disposal for the product) $62,500 $112,500 $75,000 $250,000 Quality inspection 30 35 35 100 Quality inspection cost(750xinspection for product) $22,500 $26,250 $26,250 $75,000 Machine hours 2000 7000 1000 10000 Utilities (6.6 x machine hour for product) $13,200 $46,200 $6,600 $66,000 3. New Target Price Product A Product B Product C Cost per unit under ABC method $214.00 $169.80 $373.00 New Target price (150% of cost per unit) $321.00 $254.70 $559.50 Actual selling Price $286.00 $255.60 $310.00 Difference ($35.00) $0.90 ($249.50) 4. As per the results based on activity based unit costs, it is advisable to phase out product C and increase the production and sales of Product B. Product A actual selling price is less then the New target price, but still it is profitable based on the quantity of production and sales. More information can be gathered and step can be taken to reduce cost of Product A.
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