A) Compute total budgeted indirect costs for November B) Compute the total unit

Question

A) Compute total budgeted indirect costs for November

B) Compute the total unit indirect cost of each model

C) Assume the sale price for the standard and deluxe models is 125$ and 185$ respectively, and that Clear Tone Telephone can produce either 1,000 standard units or 1,000 deluxe phones. Which model should Clear Tone Telephone manufacture and why? Assume all other costs are the same for both models.

Clear Tone Telephone Company manufactures cellular phones using an activity-based costing system. Information for the month of November follows: Activity Materials handling Machine setup Insertion of parts Finishing Allocation Base Cost Allocation Rate Number of parts Number of setups Number of parts Finishing direct labor hours $.60 800.00 1.10 15.00 Clear Tone Telephone produces two models of the cellular phone: a standard model and a deluxe model. Budgeted data for November are as follows: Standard 35 2 Deluxe Parts per unit Setups per 500 units Finishing direct labor hours per unit Direct materials cost per unit Management expects to produce 1,000 units of each model during November 50 $26 $43

Explanation / Answer

Solution:

A) From above table total budget indirect costs for november is $195,900.

B) Unit indirect cost for each model:

Standard model = $77,700 / 1000 = $77.70 per unit

Deluxe Model = $118,200 / 1000 = $118.20 per unit

C) Sale price of standard model = $125, Sales price of deluxe model = $185

If clear tone telephone can produce either of 1000 units of standard units and 1000 deluxe phones than to chose which model clear tone should produce, we have to look which model gives higher contribution per unit as fixed indirect cost is unavoidable and irrelevant for decesion making.

As other costs are same for both models let same to be assumed as zero;

Therefore contribution per unit for

Standard unit = $125 - $26 = $99 per unit

Deluxe phone = $185 - $43 = $142 per unit

As contribution per unit of deluxe phone is higher than standard phone by $43 per unit, therefore clear tone should manufacture deluxe phone.

Allocation and Computation of indirect cost Activity Allocation Base Allocation Rate Standard Model Deluxe Model Total Cost Allocation Base Qty Allocated Cost Allocation Base Qty Allocated Cost Material handling Nos of parts $0.60 1000*35 = 35000 $21,000.00 1000*50 = 50000 $30,000.00 $51,000.00 Machine Setup Nos of setups $800 1000/500*2 = 4 $3,200.00 1000/500*2 = 4 $3,200.00 $6,400.00 Insertion of Parts Nos of parts $1.10 1000*35 = 35000 $38,500.00 1000*50 = 50000 $55,000.00 $93,500.00 Finishing Finishing Direct Labor hours $15 1000*1 = 1000 $15,000.00 1000*2 = 2000 $30,000.00 $45,000.00 Total $77,700.00 $118,200.00 $195,900.00

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