Speedo Co. assembles three types of motorcycle at the same factory: the 50cc Fas
ID: 2529215 • Letter: S
Question
Speedo Co. assembles three types of motorcycle at the same factory: the 50cc Fast; the 250cc Quickie and the 1000cc Zoom. It sells the motorcycles throughout the world. In response to market pressures Speedo Co. has invested heavily in new manufacturing technology in recent years and , thus, has significantly reduced the size of its workforce. Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing Activity Based Costing (ABC). Speedo Co's accountant has produced the following analysis.
The three cost drivers that generate overheads are:
1. Deliveries to retailers-the number of deliveries of motorcycles to retail showrooms
2. Set-ups-the number of times the assemby line process is re-set to accommodate a production run of a different type of motorcycle
3. Purchase orders-the number of purchase orders.
The annual cost driver volumes relating to each activity and for each type of motorcycle are:
The annual overhead costs relating to these activities are as follows:
Deliveries to retailers 2,400,000
Set-up costs 6,000,000
Purchase orders 3,600,000
All direct labour is paid at $5 per hour. The company holds no inventories
Required:
Calculate the total profit on each of Speedo Co's three types of product using each of the following methods to attribute overheads:
(i) the existing method based upon labour hours
(ii) activity based costing.
Annual output (units) Annual direct labour hours Selling price ($ per unit) Raw material cost ($ per unit) Fast 2000 200,000 4,000 400 Quickie 1600 220,000 6,000 600 Zoom 400 80,000 8,000 900Explanation / Answer
Answer i. Predetermined Overhead Rate = $12,000,000 (Total Overhead) / 500,000 DLH Predetermined Overhead Rate = $24 per DLH Income Statement Under Traditional Method Fast Quickie Zoom Sales in Units 2,000.00 1600 400 SP per Unit 4,000.00 6000 8000 Sales In $ 8,000,000.00 9,600,000.00 3,200,000.00 Direct Materials 800,000.00 960,000.00 360,000.00 Direct Labor 1,000,000.00 1,100,000.00 400,000.00 Factory Overhead 4,800,000.00 5,280,000.00 1,920,000.00 Total Costs 6,600,000.00 7,340,000.00 2,680,000.00 Net Operating Income 1,400,000.00 2,260,000.00 520,000.00 Answer ii. Activity Overhead Cost Driver Quantity Allocation Rate Indirect Costs Deliveries to retailers 2,400,000 250 Deliveries 9,600.00 per delivery Set up Costs 6,000,000 100 setups 60,000.00 per setup Purchase Orders 3,600,000 800 purchase orders 4,500.00 per purch. Order Total 12,000,000 Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Fast Quickie Zoom. Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Deliveries to retailers 9,600.00 per delivery 100 Deliveries 960,000 80 Deliveries 768,000 70.00 Deliveries 672,000.00 Set up Costs 60,000.00 per setup 35 setups 2,100,000 40 setups 2,400,000 25.00 setups 1,500,000.00 Purchase Orders 4,500.00 per purch. Order 400 purchase orders 1,800,000 300 purchase orders 1,350,000 100.00 purchase orders 450,000.00 Total Indirect Cost 4,860,000 4,518,000 2,622,000 Income Statement Under Traditional Method Fast Quickie Zoom Sales in Units 2,000.00 1600 400 SP per Unit 4,000.00 6000 8000 Sales In $ 8,000,000.00 9,600,000.00 3,200,000.00 Direct Materials 800,000.00 960,000.00 360,000.00 Direct Labor 1,000,000.00 1,100,000.00 400,000.00 Factory Overhead 4,860,000.00 4,518,000.00 2,622,000.00 Total Costs 6,660,000.00 6,578,000.00 3,382,000.00 Net Operating Income 1,340,000.00 3,022,000.00 (182,000.00)
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