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A manufacturing business makes a product in two models. M1 and M2. Details of the two...

A manufacturing business makes a product in two models. M1 and M2. Details of the two products are as follows:

                                                                                                             M1                           M2

Annual sales                                                                                  8,000 units               8,000 units

Number of sales orders                                                                         60                           250

Sales price per unit                                                                              ₵54                          ₵73

Direct material cost per unit                                                                 ₵11                           ₵21

Direct labour hours per unit                                                                2.0 hours                2.5 units

Direct labour rate per hour                                                                     ₵8                           ₵8

Special parts per unit                                                                              2                                8

Production batch size                                                                        2,000 units              100 units

Set-ups per batch                                                                                    1                               3

Production batch size                                                                               1                               1

Setups per batch:                                                                                      cost driver

Issues of material for each batch                97,600                                   number of setups

Overhead analysis                                      42,000                                   number of batches

Setup costs                                                  50,000                                  number of special parts

Material handling costs                                31,000                                   number of sales orders

Special part handling costs                       108,000                                   direct labour hours

Customer invoicing costs                           328,600

A customer has indicated an interest in placing a large order for either model M1 or M2, and the sales manager wished to try to sell the higher-priced model M2.

Required

  1. Calculate the profit using traditional absorption costing

Solutions

Expert Solution

Answer-

Working

M1

M2

A

No. of units

                8,000

                8,000

B

Batch Size

                2,000

                   100

C = A/B

No. of batches

                        4

                      80

D

Setups per batch

                        1

                        3

E = C x D

No. of setups

                        4

                   240

F

Special parts per unit

                        2

                        8

G = A x F

No. of special parts

              16,000

             64,000

H

DLH per unit

                        2

                        3

I = A x H

Total DLHs

              16,000

             20,000

---Step 2: Calculation of activity rate per cost driver

No. of cost drivers for

Activity Cost pool

Overhead cost

Cost drivers

M1

M2

Total no. of cost drivers

Activity Rate per cost driver

Setup costs

$    97,600.00

Setup

                          4

                        240

                          244

$        400.000

per Setup

Material handing cost

$    42,000.00

Batch

                          4

                           80

                            84

$        500.000

per Batch

Special part handling costs

$    50,000.00

Special part

               16,000

                  64,000

                    80,000

$             0.625

per Special part

Invoicing

$    31,000.00

Sale Order

                       60

                        250

                          310

$        100.000

per Sale Order

Other overheads

$ 108,000.00

Direct labor hour

               16,000

                  20,000

                    36,000

$             3.000

per Direct labor hour

Total

$ 328,600.00

---Step 3: Allocation of overhead to M1 using above activity rates

Overhead allocation to M1

Activity Rate per cost driver

No. of cost driver for M1

Overheads allocated

Setup costs

$        400.000

per Setup

                          4

$           1,600.00

Material handing cost

$        500.000

per Batch

                          4

$           2,000.00

Special part handling costs

$             0.625

per Special part

               16,000

$         10,000.00

Invoicing

$        100.000

per Sale Order

                       60

$           6,000.00

Other overheads

$             3.000

per Direct labor hour

               16,000

$         48,000.00

Total Overheads allocated

$         67,600.00

Total M1 Units

                     8,000

Overhead cost per unit

$                    8.45

---Step 4: Allocation of overhead of M2 using activity rates

Overhead allocation to M2

Activity Rate per cost driver

No. of cost driver for M1

Overheads allocated

Setup costs

$        400.000

per Setup

                     240

$         96,000.00

Material handing cost

$        500.000

per Batch

                       80

$         40,000.00

Special part handling costs

$             0.625

per Special part

               64,000

$         40,000.00

Invoicing

$        100.000

per Sale Order

                     250

$         25,000.00

Other overheads

$             3.000

per Direct labor hour

               20,000

$         60,000.00

Total Overheads allocated

$       261,000.00

Total M2 Units

                     8,000

Overhead cost per unit

$                 32.63

  • Requirement (a): Answer, based on above

M1

M2

Sale Price per unit

$            54.00

$            73.00

Per unit cost:

Direct material

$            11.00

$            21.00

Direct Labor

$            16.00

$            20.00

Overheads allocated

$               8.45

$            32.63

Total per unit cost

$            35.45

$            73.63

Net Profit per unit

$            18.55

$            (0.63)

Profit under traditional costing:-

M1 M2
Direct material 11.00 21.00
Direct labor 16.00 20.00
Overhead cost per unit 18.26 22.83
Unit cost 45.26 63.83
Selling price 54.00 73.00
Profit 8.74 9.18

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