Question

Case Study 2

M & M LLC is producing different range of chocolates mainly including fruits & nuts, caramel smooth, dark fantasy.

Assume you are senior accountant of M & M LLC and comparing between both the methods of costing absorption and ABC system on the basis of following information:

Prime Cost Details: -

1. RO 0.150 per unit on materials and RO 0.120 per unit on direct labour paid for fruits & nuts.
2. RO 0.120 per unit materials and RO 0.100 per unit on direct labour paid for caramel smooth.
3. RO 0.180 per unit on materials and RO 0.130 per unit on direct labour paid for dark fantasy.

Production detail: -

In the month of June Company is expected to produce 200,000 units of fruits & nuts; 150,000 units of caramel smooth; 100,000 units of dark fantasy.

Overheads, Activity and Cost Driver Details: -

1. The labour hour per units 0.02 for fruits & nuts; 0.010 for caramel smooth; and 0.015 for dark fantasy.
2. The production cost incurred RO 3,600. Machines runs 700 hours for fruits & nuts; 500 hours for caramel smooth; 400 hours for dark fantasy;
3. The machine set-up cost incurred RO 2,800. The production runs 120 for fruits & nuts; 80 for caramel smooth; 75 for dark fantasy.
4. The Procurement costs incurred RO 1,800. Number of purchase order 50 for fruits & nuts; 35 for caramel smooth; 45 for dark fantasy;
5. The delivery costs incurred RO 900. Number of deliveries 42 for fruits & nuts; 40 for caramel; and 38 for dark fantasy.

Requirements: -

1. Calculate total cost and cost per unit of each types of chocolate by applying absorption costing.                                                                                                                
2. Calculate the total cost and cost per unit of each types of chocolate by applying ABC system.                                                                                                                 
3. Calculate the selling price by adding 20% mark up on cost for each brand of chocolate. Also, analyze over costing and under costing for each type of chocolate.  

                                                                                                                           

Answer 1

1.

Under absorbtion method all overheads are apportion based on machine hours neede for each products

Here overheads costs include production cost, machine set-up cost, Procurement costs, and delivery costs

.

Calculation of Total cost and cost per unit of products under Absorbtion method

Particulars	Fruits & Nuts	Caramel Smooth	Dark Fantasy
Units produce	200000	150000	100000
Machine hours needed	700	500	400
Total labor hors	4000          (.02*200000)	1500           (.010*150000)	1500           (.015*100000)
	per unit	Total	per unit	Total	per unit	Total
materials	0.150	30,000	0.120	18,000	0.180	18,000
direct labour	0.120	24,000	0.100	15,000	0.130	13,000
Overhead costs (3600+2800+1800+900 = 9100)		3,981		2,844		2,275
		9100/1600*700		9100/1600*500		9100/1600*400
Total cost		57,981		35,844		33,275
per unit cost (total cost / no of units		0.290		0.239		0.333

2.

Calculation of Total cost and cost per unit of products under ABC method

Particulars	cost/cost driver	Fruits & Nuts	Caramel Smooth	Dark Fantasy
Units of activity	Total	Units of activity	Total	Units of activity	Total
materials			30,000.00		18,000.00		18,000.00
direct labour	7.43	4,000.00	29,720.00	1,500.00	11,145.00	1,500.00	11,145.00
production cost	2.25	700.00	1,575.00	500.00	1,125.00	400.00	900.00
machine set-up cost	10.18	120.00	1,221.82	80.00	814.55	75.00	763.64
Procurement costs	13.85	50.00	692.31	35.00	484.62	45.00	623.08
delivery costs	7.50	42.00	315.00	40.00	300.00	38.00	285.00
Total			63,524.13		31,869.16		31,716.71
units produced			200,000		150,000		100,000
Cost per unit under ABC			0.318		0.212		0.317

Workin note :1 Computation cost/ cost driver

Allocation of Cost based Cost-driver
Cost	Cost driver	cost /cost driver
Labor cost	52000	Labor hours	7000	7.43
production cost	3600	Machine hour	1600	2.25
machine set-up cost	2800	production runs	275	10.18
Procurement costs	1800	Purchase order	130	13.85
delivery costs	900	delivaries	120	7.50

Workin note :1 Computation labor cost

(0.12*200000)+(0.1*150000)+(0.13*100000)

3.

Computation od felling price per unit of each product

Particulars	Fruits & Nuts	Caramel Smooth	Dark Fantasy
Cost per unit under ABC	0.318	0.212	0.317
Markup 20% of cost	0.064	0.042	0.063
Selling price (cost +markup)	0.381	0.255	0.381

4.

Particulars	Fruits & Nuts	Caramel Smooth	Dark Fantasy
Cost per unit under ABC	0.318	0.212	0.317
Cost per unit under absorbtion costing	0.290	0.239	0.333
Undercosting /(Over costing )	0.028	(0.026)	(0.016)
Comment	Under-costed	Over-costed	Over-costed