Question

Generic Motors Corporation has two product lines, A and B. Its revenue and costs for last year is as follows:

	Product A	Product B	Total
sales volume (units)	100	200	300
Revenue	$6,000	$30,000	$36,000
Costs:
direct materials	$1,200	$6,000	$7,200
direct labor	$3,000	$12,000	$15,000
OH costs			$11,700
Profit			$2,100

Generic Motors uses ABC to allocate the overhead costs. It examined the main activities in the firm, and decided to break up the total overhead costs of $11,700 into 3 cost pools:
* "labor-related" - the total cost in this pool is $3,000, allocated based on direct labor dollars
* "sales-related" - the total cost in this pool is $2,700, allocated based on number of units
* "production setups" - the total cost in this pool is $6,000, allocated based on the number of production setups. Product A requires 10 setups. Product B requires is 40 setups.

Required:

a) for each cost pool, compute the activity rate and the amounts allocated to product A and product B.
(hint: The amounts allocated to A and B from each pool should add up to the total cost in that pool. To allocate the costs in the "production setups" pool, you will have to compute the number of batches. If the total number of batches for A and B does not add up to 50, you are doing something wrong).
* "labor-related" pool:
   activity rate = $  per DL$
   Labor-related OH costs allocated to A = $
   Labor_related OH costs allocated to B = $
* "sales-related" pool:
   activity rate = $  per unit
   Sales-related OH costs allocated to A = $
   Sales_related OH costs allocated to B = $
* "production setups" pool:
   activity rate = $  per setup
   Production setups OH costs allocated to A = $
   Production setups OH costs allocated to B = $

b) using the allocated OH costs from (a), compute the profit margin for product A and product B.
If you get a negative number, enter it with a minus sign, i.e., enter negative $100 as -100, not ($100)
profit margin for A = $
profit margin for B = $

Answer 1

Meaning of ABC system: Activity Based costing is an accounting methodology that assigns costs to activities rather than products or services. This enables resources and overhead costs to be more accurately assigned to products & services that consume them. ABC is a technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different cost object/job/products/customers or services.

ABC assigns cost to activities based on their use of resources. It then assigns cost to cost objects such as products or customers based their use of activities. ABC can track the flow of activities in an organization by creating link between the activity (resource consumption) and the cost object