Question

Case Study 2

Elite Home Appliances, LLC is producing different range of home appliances such as microwave oven, washing machines, dish washer, refrigerator, etc.

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

Production detail: -

In the month of June |Company expected to produce 100 units of microwave oven; 50 units of dish washer; 200 units of washing machines and 150 units of refrigerator.

Overheads, Activity and Cost Driver Details: -

(i) The overhead costs on production of components incurred RO 5,500. Machines run 2,000 hours (400 hours for Microwave ovens; 200 hours for dish washers; 600 hours for washing machines; 800 hours for refrigerators).

(ii) The overhead costs incurred on set-up RO 1,800. Number of set-up used 70 times (6 times for microwave ovens; 10 times for dish washers; 34 times for washing machines; 20 times for refrigerator) for all units produced.

(iii) The overhead costs on assembly of components incurred RO 4,500. Labor on assembly of components worked for 1,500 hours (325 hours for Microwave ovens; 325 hours for dish washers; 450 hours for washing machines; 350 hours for refrigerators).

(iv) The overhead costs incurred on packaging RO 2,400. Total 500 units of all types of home appliances packed.

(v) The overhead costs incurred on shipping RO 1,200. Total 500 units of all types of home appliances shipped.

Note: - Labor hours given for assembly of component will be the basis of apportionment and other calculation.

Prime Cost Details: -

(i) RO 15.00 per unit on component materials and RO 9.00 per unit on direct labour paid for microwave oven.

(ii) RO 17.50 per unit on component materials and RO 12.0 per unit on direct labour paid for dish washer.

(iii) RO 35.00 per unit on component materials and RO 25.000 per unit on direct labour paid for washing machines.

(iv) RO 45.00 per unit on component materials and RO 30.0 per unit on direct labour paid for refrigerator.

Requirements: -

1. Calculate total cost and cost per unit of each home appliances by applying absorption costing. [5 Marks]

2. Calculate the total cost and cost per unit of each home appliance by applying ABC system.

[5 Marks]

3. Calculate the selling price by adding 25% mark up on cost for each product. Also, Analyze over costing and under costing for each home appliance. [2.5 + 2.5 Marks]

Answer 1

1) calculation of total cost and cost per unit of each home appliance by absorption method

particular	total cost of microwave oven	cost per unit of microwave oven (100 units )	total cost of washing machines	cost per unit of washing machines (200 units )	total cost of dish washer	cost per unit of dish washer ( 50 units)	total cost of refrigerator	cost per unit of refrigerator (150 units )
direct material cost	100x15=1500	15	200x35=7000	35	50x17.5=875	17.5	150x45=6750	45
direct labour cost	100x9=900	9	200x25=5000	25	50x12=600	12	150x30=4500	30
total overhead cost	325x10.27=3337.75	33.38	450x10.27=4621.5	23.11	325x10.27=3337.75	66.76	350x10.27=3594.5	23.96
total cost	5737.75	57.38	16621.5	83.11	4812.75	96.26	14844.5	98.96

working notes-

totals overhead cost = overhead costs on production of components + overhead costs incurred on set-up+overhead costs on assembly of components +overhead costs incurred on packaging +overhead costs incurred on shipping

total overhead cost= 5500+1800+4500+2400+1200=15400

Labor hours for all components will be the basis of apportionment of total overhead cost under absorption method.

total labour hours = 325 hours for Microwave ovens+ 325 hours for dish washers+ 450 hours for washing machines+ 350 hours for refrigerators= 1500 hours

total overhead cost per hour = 15400/1500=10.27

2) calculation of total cost and cost per unit of each home appliance by ABC system

costpool	cost	allocation	cost driver	calculation	cost driver rate
overhead costs on production of components	5500	machine hours run	400+600+200+800=2000	5500/2000	2.75
overhead costs incurred on set-up	1800	Number of set-up used	6+34+10+20=70	1800/70	25.71
overhead costs on assembly of components	4500	Labor on assembly of components worked	325+450+325+350=1500	4500/1500	3
overhead costs incurred on packaging	2400	all type of home aplliances	100+200+50+150=500	2400/500	4.8
overhead costs incurred on shipping	1200	all type of home aplliances	100+200+50+150=500	1200/500	2.4

calculation of total cost and cost per unit of each home appliance

particular	total cost of microwave oven	cost per unit of microwave oven (100 units )	total cost of washing machines	cost per unit of washing machines (200 units )	total cost of dish washer	cost per unit of dish washer ( 50 units)	total cost of refrigerator	cost per unit of refrigerator (150 units )
direct material cost	100x15=1500	15	200x35=7000	35	50x17.5=875	17.5	150x45=6750	45
direct labour cost	100x9=900	9	200x25=5000	25	50x12=600	12	150x30=4500	30
overhead costs on production of components	400x2.75=1100	11	600x2.75=1650	8.25	200x2.75=550	11	800x2.75=2200	14.67
overhead costs incurred on set-up	6x25.71=154.26	1.54	34x25.71=874.14	4.37	10x25.71=257.1	5.14	20x25.71=514.2	3.43
overhead costs on assembly of components	325x3=975	9.75	450x3=1350	6.75	325x3=975	19.5	350x3=1050	7
overhead costs incurred on packaging	100x4.8=480	4.8	200x4.8=960	4.8	50x4.8=240	4.8	150x4.8=720	4.8
overhead costs incurred on shipping	100x2.4=240	2.4	200x2.4=480	2.4	50x2.4=120	2.4	150x2.4=360	2.4
total	5349.26	53.49	17314.14	86.57	3617.1	72.34	16094.2	107.3

3) Calculate the selling price by adding 25% mark up on cost for each product

a) absorption method

particular	microwave oven	washing machines	dish washer	refrigerator
total cost	5737.75	16621.5	4812.75	14844.5
(+) 25% mark up on cost	1434.44	4155.38	1203.19	3711.13
sales	7172.19	20776.88	6015.94	18555.63

b) ABC system

particular	microwave oven	washing machines	dish washer	refrigerator
total cost	5349.26	17314.14	3617.1	16094.2
(+) 25% mark up on cost	1337.32	4328.54	904.28	4023.55
sales	6686.58	21642.68	4521.38	20117.75

Analyze over costing and under costing for each home appliance

particular	microwave oven	washing machines	dish washer	refrigerator
total cost under absorption method (A)	5737.75	16621.5	4812.75	14844.5
total cost under abc system (B)	5349.26	17314.14	3617.1	16094.2
(A-B) under costing in abc system (B-A) over costing under abc system	5737.75-5349.26=388.49 under costing	17314.14-16621.5=692.64 over costing	4812.75-3617.1=1195.65 under costing	16094.2-14844.5=1249.7 over costing

note - all the answers are upto two decimals.