Question

Company XYZ has two fixed price contracts for two different clients. The company has enough capacity for both contracts but is uncertain whether they will be profitable.

Data as follows:

Customer AAA BBB

Component Type A999 B999

Contract Value($) $27,000 $100,000

Contract Quantity 1,000 unit 2,000 units

Material cost/unit $15 $20

Molding time/batch 5 hours 7.5 hours   

Batch Size 100 units 50 units

Annual Budgeted overheads as follows:

Activity Cost Driver Cost driver Cost

volume/year pool

Molding Molding hours 2,000 $150,000

Inspection Batches 150 $75,000

Production Mgmt Contracts 20 $125,000   

Calculate the activity-based costs and profits for each contract.

Answer 1

Answer:

• All working forms part of the answer
• Workings:

Working		AAA	BBB
A	No. of units	1000	2000
B	Batch Size	100	50
C= A/B	No. of batches	10	40
D	molding time per batch	5	7.5
E = C x D	Total Molding hours	50	300

• Calculation of Activity rate as per ABC method:

Activity	Cost driver	Cost driver	Cost	Activity Rate per cost driver
		[A]	[B]	[B/C]
Molding	Molding Hours	2000	$         1,50,000.00	$                 75.00 per moulding hours
Inspection	Batches	150	$             75,000.00	$               500.00 per batch
Production management	Contracts	20	$         1,25,000.00	$           6,250.00 per contract

• Overhead cost as per ABC for AAA:

Activity	Activity Rate per cost driver	No. of cost driver	Cost allocated
	[A]	[B]	[A x B]
Molding	$                 75.00 per moulding hours	50 Molding Hours	$           3,750.00
Inspection	$               500.00 per batch	10 Batches	$           5,000.00
Production management	$           6,250.00 per contract	1 Contract	$           6,250.00
		Total Overhead cost allocated	$         15,000.00

• Overhead cost as per ABC for BBB:

Activity	Cost allocated	No. of cost driver	Cost allocated
	[A]	[B]	[A x B]
Molding	$                 75.00 per moulding hours	300 Molding Hours	$         22,500.00
Inspection		40 Batches	$         20,000.00
Production management	$           6,250.00 per contract	1 Contract	$           6,250.00
		Total Overhead cost allocated	$         48,750.00

• Total Cost and Profits

Working		AAA	BBB
A	Contract Value	$                                 27,000.00	$         1,00,000.00
B = Material cost per unit x Units	Material cost	$                                 15,000.00	$             40,000.00
C [Allocated above]	Overheads allocated as per ABC	$                                 15,000.00	$             48,750.00
D = A - B - C	Profit (Loss) for contract	$                                 (3,000.00)	$             11,250.00