Brilliant Accents Company manufactures and sells three styles of kitchen faucets

Question

Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets respectively. The following additional data apply CHROME WHITE 40,000 Projected sales in units 30,000 50,000 R UNIT data Selling price $40 $20 $30 Direct materials Direct labor Overhead cost based on direct labor hours 8 $15 S 3 $ 9 (traditional system) $12 S 3 $ 9 1000-unit batch Direct labor hours Machine hours Setup hours Inspection hours 10 25 0.5 20 30 10 1.0 20 40 25 30 Total overhead costs and activity levels for the year are estimated as follows Activity Direct labor hours Machine hours Setups Inspections erhead Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours $465,500 $405,000 Required: a. Using the traditional system, determine the operating profit per unit for the brass style of faucet. b. Determine the activity-cost-driver rate for setup costs and inspection costs. c. Using the ABC system, for the brass style of faucet 1. 2. compute the estimated overhead costs per unit. compute the estimated operating profit per unit. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

Explanation / Answer

a)

b)

c)

1) Set up Hrs for 1000 units = 1, Set up OH cost for 1 hr = 4900

Set up cost for 1 unit = 4900/1000 = 4.9 per unit

Inspection hrs for 1000 units = 30, Inspection cost for 30 hrs = 150*30 = 4500

Inspection OH cost for 1 unit = 4500/1000 = 4.5 per unit

Therefore, total OH cost per unit for the brass style of faucet = 4.9 +4.5 = 9.4 per unit

2) Operating profit

d) The difference between the profits obtained from ABC & Traditional is due to OH rate. In traditional, OH cost was applied using the Cost driver as Direct Labour, whereas in ABC, OH applied rate was calculated using the specific Cost driver i.e., setup & inspection hrs. It may happen that in brass process, more direct labours are used but it takes less setup & inspection hrs, due to which OH cost under traditional method was more than the OH cost under the ABC system.

Since, ABC system uses specific cost drivers for OH cost, that's why ABC system provides a better estimate of profitability

Particulars Brass (per Unit) Amount Selling Price 40 Less : Expenses Direct Materials 8 Direct labor 15 OH Cost 12 Operating Profit 5

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