Question

Alrex company is using an activity-based costing (ABC) system. The company produces and sells two products: Basic and Pro. The company consists of two departments: Production (where all manufacturing activities are taken) and Marketing (which engages in selling and admin activity only). The ABC system includes in unit product costs all costs easily associated with units. In addition, in the ABC system, there are four major indirect activities: Machine Setups, Special Processing, Factory Supervision, and Customer Relation.

The prices, direct material cost (DM), shipping cost and direct labor-hours (DLHs) are given below for one unit of the product, as well as the total units produced and sold.

Product	Price	DM	DLHs	Hourly Wage-DL	Shipping Cost	Units
Basic	$180	$50	1	$10	$1	6,000
Pro	$320	$80	2	$12	$4	4,000

The company collected the data for ABC as follows:

Activity Cost Pool	Activity Measure	Estimated OH cost	Activity measures used
			Basic	Pro
Machine Setup	# of setups	$     472,500	60	120
Special Processing	Machine hours	$     360,000	6,000	10,000
Factory Supervision	DLH	$     224,000
Customer Relation (10 customers)	# of customers	$     240,000

The company has two major customers (A and B), who buy their products in the amounts in the table below.

Customer	A	B
Basic	800	2,000	units
Pro	1,200	1,000	units

How much is the ABC customer margin of customer B? (Choose the closest amount.)

Answer 1

Answer:

The Company produced only two products (Basic and Pro).

Direct Labor hours for Basic = Direct Labor hours per unit * No.of units produced = 1 * 6,000 = 6,000 hours

Direct Labor hours for Pro = Direct Labor hours per unit * No.of units produced = 2 * 4,000 = 8,000 hours

Here, the total no.of customers are 10.

It is assumed that no. of customers for the both the products are equal because customers like A and B are purchasing both the products.

Hence, no. of customers for each product are equal i.e., 5

Customer Margin from Customer B under ABC Costing

Customer margin of customer B = $83,500