Question

Cabat Company manufactures two products, Product C and Product D. The company estimated it would incur $177,910 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below:

Product C Product D

Estimated volume 3,800 units   3,000 units

Direct labor hours per unit 1.20 hours 0.80 hour

Direct materials cost per unit $11.60 $23.70

Direct labor cost per unit $10.80 $ 7.20

The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Estimated OH Cost Product C Product D   Total

Machine setups $ 12,190 110   120 230

Purchase orders 75,240 820 1,160 1,980

General factory 90,480 4,560 2,400 6,960

e. The government wants to buy product C and will pay the business for the cost of the product plus a fixed fee. Should you adopt the ABC system or keep the old plant-wide overhead system and why?

f. A customer has offered to buy a special order of 100 units of D for $55 each. This sale will not impact any other part of your business and you have excess capacity to produce this special order. How would this impact (pretax) profits of the business? Would you need other information to answer this question and, if so, what other information?

Answer 1

Part F

	Product C	Product D	Total
Estimated volume	3,800	3,000
Multiply: Direct labor hours per unit	1.20	0.80
Direct labor hours	4,560	2,400	6,960
Manufacturing overhead costs			$        177,910
Divided by: Direct labor hours			6,960
Predermined overhead rate per hour			$      25.56178
Plant-wide overhead system			Product C
Direct materials cost per unit			$             11.60
Direct labor cost per unit			$             10.80
Overhead cost per unit (25.56178*1.20)			$             30.67
Unit cost using the plant-wide overhead system			$             53.07

Activity Centers	Activity Costs	Divided by : Activity Level	Cost driver rate
Machine setups	12,190	230	$             53.00
Purchase orders	75,240	1,980	$             38.00
General factory	90,480	6,960	$             13.00
Product	Product C
Activity Centers	Cost driver rate	Activity	Allocated cost
Machine setups	$     53.00	110	5,830
Purchase orders	$     38.00	820	31,160
General factory	$     13.00	4,560	59,280
Total overhead Alloacted to product C			$          96,270
Divided by: Estimated volume			3,800
Overhead cost per unit			$             25.33
ABC system			Product C
Direct materials cost per unit			$             11.60
Direct labor cost per unit			$             10.80
Overhead cost per unit			$             25.33
Unit cost using the ABC system			$             47.73

Unit cost using the plant-wide overhead system			$             53.07
Unit cost using the ABC system			$             47.73
Government contract based on the cost of the product plus a fixed fee.
System with the lower cost should be selected.
ABC costing should be selected.
Company should adopt the ABC system.

Part G

Sales for special order (55*100)			$             5,500
Direct materials cost (23.7*100)		$        2,370
Direct labor cost per unit (7.2*100)		$           720	$             3,090
Pretax profit of the business increased by			$             2,410
Yes, Some other information to answer this question.
Estimated activity used by the this special order.
For example, How many machine setup used for this order?
How many purchase orders made for this order?