Goltz Company manufactures three products in its plant: X, Y, and Z. Unit costs

Question

Goltz Company manufactures three products in its plant: X, Y, and Z. Unit costs and machine hour usage for the three products are: Direct materials Direct labor Machine hours $28 $25 $40 S35 1.5 $75 S50 Budgeted production (units) 20,000 12,000 3,000 Assume that Goltz uses a traditional method of overhead allocation, based on direct labor cost Budgeted overhead for the period is $2,000,000 Compute the unit cost of production for products X,Y, and Z. b) Now assume that Goltz uses an ABC system with three cost drivers: machine hours, setups, and number of parts. Product X requires two setups per period, and requires six distinct parts. Product Y requires four setups, and ten parts. Product Zrequires ten setups and sixteen parts. Cost pools: Setups Machine hours Parts 400,000 1,300,000 2,000,000 Compute the unit cost of production for products X, Y, and Z using the ABC system Identify several possible advantages or disadvantages to Goltz of using the ABC method. (Limit 200 words).

Explanation / Answer

Solution a:

Solution b:

Solution c:

Advanatage of ABC method:

1. The cost is accurate and reliable under ABC because it recognize the activities which cause costs, not products and it is product which consumes activities.

2. ABC identifies the real nature of cost behaviour and helps in reducing costs and identifying activities which do not add value to the product.

3. As ABC provides most reliable cost data, hence it helps managers in decesion making.

Disadvantge of ABC:

1. ABC has various cost pools and multiple cost drivers and therefore it is more complex than traditional product costing systems

2. It is very difficult under ABC to select cost drivers and assignment of common costs.

3.ABC systems require management to estimate costs of activity pools and to identify and measure cost drivers to serve as cost allocation bases. This activity is lot of time consuming and costly as well.

Computation of overhead recovery rate - traditional method Particulars X Y Z Total Budgeted Production (In Units) 20000 12000 3000 Direct labor cost per unit 25 35 50 Budgeted Direct labor cost 500000 420000 150000 1070000 Budgeted Overhead 2000000 Overhead Recovery Rate (per $ of direct labor cost) 1.8691589

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