Product Costing in An ABC System (Activity-Based Costing and Other cost manageme
ID: 2589499 • Letter: P
Question
Product Costing in An ABC System (Activity-Based Costing and Other cost management tools)
P24-25A Lawton, Inc., manufactures bookcases and uses an activity-based costing system. Lawton's activity areas and related data follovw Cost Allocation Rate 0.80 15.00 3.90 Budgeted Cost of Activity Allocation Base Activity Materials handling Assembling Finishing 200,000 Number of parts 3,000,000 160,000 Direct labor hours Number of finished units Lawton produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs and other data follow Total Total Direct Tota Assembling Total Units Materials Numb Direct Labor Produced Costs of Parts Standard bookcase 3,000 $29,300 80,000 28,800 84,000 Product Hours 3,000 2,000 Unfinished bookcase 3,600 Requirements 1. Compute the manufacturing product cost per unit of each type of bookcase. (pp. 1209, 1210) 2. Suppose that premanufacturing activities, such as product design, were assigned to the standard bookcases at $4 each and to the unfin ished bookcases at $3 each. Similar analyses were conducted of post- manufacturing acrivities such as distribution, marketing, and cus tomer service. The postmanufacturing costs were $20 per standard bookcase and $15 per unfinished bookcase. Compute the full prod uct costs per unit. (p. 1213) 3. Which product costs are reported in the external financial state- ments? Which costs are used for management decision making? Explain the difference. 4. What price should Lawton's managers set for unfinished bookcases to earn a unit profit of $16? (p. 1210)Explanation / Answer
1. Calculation of Manufacturing Product cost per unit
Particulars
Standard Bookcase
Unfinished Bookcase
Direct Material Cost
29,300
28,800
Material Handling Cost
(0.80 x 80,000)
(0.80 x 84,000)
64,000
67,200
Assembling Cost
($15 x 3,000)
($15 x 2,000)
45,000
30,000
Finishing
($3.90 x 3,000)
($3.90 x 3,600)
11,700
14,040
Total Manufacturing Cost
150,000
140,040
Manufacturing Cost per Unit:
Standard Bookcase = $150,000 / 3,000 = $50 per unit
Unfinished Bookcase = $140,040 / 3,600 = $38.9 per unit
2. Calculation of Full product cost per unit
Particulars
Standard Bookcase
Unfinished Bookcase
Manufacturing Cost per unit
50
38.9
Product Design
4
3
Distribution, marketing & Customer Service
20
15
Full Product Cost per unit
74
56.9
3. External Financial Statements - While reporting costs in external financial statements, only manufacturing costs are reported as the same are directly related to the cost of goods sold and are shown in the income statement of the company. Other pre & post manufacturing costs are not reported as they are required only for the internal decision making purposes. Moreover, income statement provided to the outsiders is generally much more brefied than the one used by the management.
For the purpose of decision making, management takes into account the manufacturing cost of the product along with post manufaccturing costs like distribution, marketing & customer service. Pre manufacturing costs are irrelevant for decision making as the same are historic costs and have already been incurred. These are not avoidable. Management takes decision on the basis of the costs which can be avoided in the future.
Product costs in external financial statements are only manufacturing costs but for management decision making it also includes non-manufacturing costs like post manufacturing costs of customer service. Moreover, it is more detailed in case of management reports as revenue, costs and profits are shown on the basis of individual items manufactured but in case of external financial statements it is shown as total figures.
4. Price to be set for unfinished bookcases.
Price to be set = Total Manufacturing Cost per unit + Post manufacturing avoidable cost + Profit to be earned
= $38.9 + 15 + 16 = $69.9 per unit.
Particulars
Standard Bookcase
Unfinished Bookcase
Direct Material Cost
29,300
28,800
Material Handling Cost
(0.80 x 80,000)
(0.80 x 84,000)
64,000
67,200
Assembling Cost
($15 x 3,000)
($15 x 2,000)
45,000
30,000
Finishing
($3.90 x 3,000)
($3.90 x 3,600)
11,700
14,040
Total Manufacturing Cost
150,000
140,040
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