June Company makes 2 types of products, standard model (S)and miniature model(M)
ID: 2734487 • Letter: J
Question
June Company makes 2 types of products, standard model (S)and miniature model(M). June Company plans to make 60 batches of S and 30 batches of the more complicated M. S are produced in batches of 200 but the M are produced in batches of 150 for the coming year. The company classifies all of its labor costs as fixed overheads(hired permanently) and does not have any direct labor. Direct material cost per unit for the S is $1.05 per unit and for the M is $0.9 per unit. The annual production overhead is estimated to be $38,000 which has been analyzed into 4 activities with the cost drivers defined as below: ESTIMATED ACTIVITY COST COST DRIVER Setting up machinery $9,000 number of machine setups Buying raw materials 10,000 number of purchase order Controlling quality 4,000 number of inspections Operating machinery 15,000 number of machine hours The annual number of cost drivers is split between the two products as follows: COST DRIVER S Model M Model Machine setups 60 30 Purchase orders 12 38 Quality inspections 60 100 Machine hours 6,000 4,000 SHOW all your work and complete all parts. 1. If the company allocates the production overhead costs using machine hours as a companywide allocation base, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 2. If the company uses the ABC system, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 3. Comment on the total combined cost of the 2 models under the 2 methods (1&2 above). Why would you select the ABC system instead of the traditional system using a single rate? Why would you not implement the ABC system? 4. If June Company uses the cost plus method of pricing the 2 models (assuming +20%), compare the price of the 2 products using the 2 methods in 1&2. 5. A new competitor has entered the market and the sellable price set on the market for S is $2.75/unit and M is $5.00/unit. Advise June on the situation. June Company makes 2 types of products, standard model (S)and miniature model(M). June Company plans to make 60 batches of S and 30 batches of the more complicated M. S are produced in batches of 200 but the M are produced in batches of 150 for the coming year. The company classifies all of its labor costs as fixed overheads(hired permanently) and does not have any direct labor. Direct material cost per unit for the S is $1.05 per unit and for the M is $0.9 per unit. The annual production overhead is estimated to be $38,000 which has been analyzed into 4 activities with the cost drivers defined as below: ESTIMATED ACTIVITY COST COST DRIVER Setting up machinery $9,000 number of machine setups Buying raw materials 10,000 number of purchase order Controlling quality 4,000 number of inspections Operating machinery 15,000 number of machine hours The annual number of cost drivers is split between the two products as follows: COST DRIVER S Model M Model Machine setups 60 30 Purchase orders 12 38 Quality inspections 60 100 Machine hours 6,000 4,000 SHOW all your work and complete all parts. 1. If the company allocates the production overhead costs using machine hours as a companywide allocation base, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 2. If the company uses the ABC system, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 3. Comment on the total combined cost of the 2 models under the 2 methods (1&2 above). Why would you select the ABC system instead of the traditional system using a single rate? Why would you not implement the ABC system? 4. If June Company uses the cost plus method of pricing the 2 models (assuming +20%), compare the price of the 2 products using the 2 methods in 1&2. 5. A new competitor has entered the market and the sellable price set on the market for S is $2.75/unit and M is $5.00/unit. Advise June on the situation. June Company makes 2 types of products, standard model (S)and miniature model(M). June Company plans to make 60 batches of S and 30 batches of the more complicated M. S are produced in batches of 200 but the M are produced in batches of 150 for the coming year. The company classifies all of its labor costs as fixed overheads(hired permanently) and does not have any direct labor. Direct material cost per unit for the S is $1.05 per unit and for the M is $0.9 per unit. The annual production overhead is estimated to be $38,000 which has been analyzed into 4 activities with the cost drivers defined as below: ESTIMATED ACTIVITY COST COST DRIVER Setting up machinery $9,000 number of machine setups Buying raw materials 10,000 number of purchase order Controlling quality 4,000 number of inspections Operating machinery 15,000 number of machine hours The annual number of cost drivers is split between the two products as follows: COST DRIVER S Model M Model Machine setups 60 30 Purchase orders 12 38 Quality inspections 60 100 Machine hours 6,000 4,000 SHOW all your work and complete all parts. 1. If the company allocates the production overhead costs using machine hours as a companywide allocation base, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 2. If the company uses the ABC system, determine the total cost and cost per unit for each model as well as the combined cost of the 2 models. 3. Comment on the total combined cost of the 2 models under the 2 methods (1&2 above). Why would you select the ABC system instead of the traditional system using a single rate? Why would you not implement the ABC system? 4. If June Company uses the cost plus method of pricing the 2 models (assuming +20%), compare the price of the 2 products using the 2 methods in 1&2. 5. A new competitor has entered the market and the sellable price set on the market for S is $2.75/unit and M is $5.00/unit. Advise June on the situation.Explanation / Answer
1. If the company allocates overhead cost using machine hours as allocation base, predetermined overhead rate = $ 38,000 / 10,000 = $ 3.8
Total combined cost = $ 2.95 x 12,000 + $ 4.28 x 4,500 = $ 54,660
2. Activity based costing:
Total combined cost = $ 2.625 x 12,000 + $ 5.14 x 4,500 = $ 54,630
4. Cost plus pricing under traditional costing :
Product S : $ 2.95 + 20% = $ 3.54; Product M : $ 4.28 + 20% = $ 5.14
Cost plus pricing under activity based costing :
Product S : $ 2.625 + 20% = $ 3.15 Product M : $ 5.14 + 20% = $ 6.17
Activity Total cost Allocation base Volume of activity driver Recovery rate Machine setup $ 9,000 Number of machine setups 90 $ 100 per setup Buying raw materials $ 10,000 Number of purchase orders 50 $ 200 per purchase order Controlling quality $ 4,000 Number of inspections 160 $ 25 per inspection Operating machinery $ 15,000 Number of machine hours 10,000 $ 1.50 per machine hour $ 38,000Related Questions
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