Question

Soundex Inc. produces two types of audio cassettes: standard and high quality. Standard cassettes are mainly used in answering machines and are designed to last longer than for precise sound reproduction. The company only recently started producing the premium, high-end model to enter the lucrative music recording market. Since the new product was introduced, profits have steadily declined. Management believes that the accounting system may not be able to accurately allocate costs to products, especially as sales of the new product have increased.

Management has asked you to investigate the problem of cost allocation. You find indirect manufacturing costs are currently charged to products based on direct labor costs. For your survey, you have data from last year. Last year's manufacturing overhead was $ 440,000, based on 320,000 standard cassettes and 100,000 high-quality cassettes. The direct labor and material costs are as follows:

	Standard Model	High quality model	Total
Direct Labor	$174000	$66000	$240000
Raw Materials	$125000	$114000	$239000

Activities	Cost Driver	Assigned cost	Standard	High Quality	Total
Activity 1	Number of cycle of production	$200000	40	10	50
Activity 2	Quality Test done	$180000	12	18	30
Activity 3	Processed Order shipping	$60000	100	50	150
	Total indirect manufacturing cost	$440000

1.a How much of the indirect manufacturing costs will be allocated to each product if the three cost drivers above are used to allocate indirect manufacturing costs?

a. $ 0.78 per unit for the standard model and $ 1.48 per unit for the high quality model

b. $ 0.85 per unit for the standard model and $ 1.68 per unit for the high quality model

c. $ 0.78 per unit for the standard model and $ 1.48 per unit for the high quality model

d. $ 0.93 per unit for the standard model and $ 1.68 per unit for the high quality model

1.b What is the total cost per unit produced for each product?

a. $ 1.93 per unit for the standard model and $ 1.21 per unit for the high quality model

b. $ 1.78 per unit for the standard model and $ 1.21 per unit for the high quality model

c. $ 1.78 per unit for the standard model and $ 3.48 per unit for the high quality model

d $ 1.93 per unit for the standard model and $ 3.48 per unit for the high quality model

1.c What share of the indirect manufacturing costs will be allocated to each product if the direct labor costs had been used to charge the indirect manufacturing costs?

a. $ 0.78 per unit for the standard model and $ 1.21 per unit for the high quality model

b. $ 0.78 per unit for the standard model and $ 1.48 per unit for the high quality model

c. $ 0.99 per unit for the standard model and $ 1.48 per unit for the high quality model

d. $ 0.99 per unit for the standard model and $ 1.21 per unit for the high quality model

1.d What would be the total cost per unit produced for each product if direct labor costs were used to charge indirect manufacturing costs?  

a. $ 1.93 per unit for the standard model and $ 3.01 per unit for the high quality model

b. $ 1.78 per unit for the standard model and $ 3.48 per unit for the high quality model

c. $ 1.78 per unit for the standard model and $ 3.01 per unit for the high quality model

d. $ 1.93 per unit for the standard model and $ 3.48 per unit for the high quality model

1.e The differences in the cost per unit produced of each model according to the two approaches (accounting by activity vs. traditional approach with an overall imputation rate) are explained mainly by:

a. the fact that the CPA method includes part of the commercial and administrative costs in the cost of products.

b. the fact that the CPA method uses more cost drivers (at the activity level) than the traditional method.

c. the fact that the CPA method uses the concept of normal capacity at the level of each activity rather than the forecast units of work.

d. all of the above.

1.f What could be the reason for using the activity accounting method?

a. it allows to calculate more precise costs

b. it complies with IFRS accounting standards

c. it allows to realize more benefits

d. it is easier to implement

Answer 1

Q1a)   Option b. $ 0.85 per unit for the standard model and $ 1.68 per unit for the high quality model

Q1b)   Option c. $ 1.78 per unit for the standard model and $ 3.48 per unit for the high quality model

Q1c)   Option d. $ 0.99 per unit for the standard model and $ 1.21 per unit for the high quality model

Q1d)   Option a. $ 1.93 per unit for the standard model and $ 3.01 per unit for the high quality model

Q1e)   Option b. the fact that the CPA method uses more cost drivers (at the activity level) than the traditional method.

Q1f)   Option a. it allows to calculate more precise costs