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MNO uses activity based costing where overhead from three different cost centers are allocated to products...

MNO uses activity based costing where overhead from three different cost centers are allocated to products based upon the following:

Activity Driver Overhead Costs                                   Product A                                Product B

Setup                       Production Runs $100,000 80 productions runs 20 production runs

Inspection           Inspection Hours $300,000 200 hours                               100 hours

Machining            Machine Hours $800,000 5,000 hours                          3,000 hours

Raw materials are directly followed to each product and the amount of raw materials used for Product A was $300,000 and for Product B was $200,000. Direct labor is directly followed to each product and the amount of direct labor used for product A was $100,000 and for product B was $50,000. There were 12,000 units of product A manufactured and 10,000 units of product B manufactured.

1. Calculate the total unit cost of making product A and product B using ABC. Show computations.

2. If MNO uses one plant wide rate to allocate all the overhead based upon direct labor direct labor hours and product A used 20,000 direct labor hours and product B used 10,000 direct labor hours calculate the total unit cost of product A and product B.

Solutions

Expert Solution

a) Calculation of Unit Cost under ABC Costing System:

Working Note 1: Calculation of cost per cost driver

Particulars Cost Driver Total Cost No of Cost Driver Cost per Cost Driver Cost allocated to Product A Cost Allocated to Product B
Setup Cost Production Run 100000 100 1000 80000 20000
Inspection Cost Inspection Hours 300000 300 1000 200000 100000
Machining Cost Machining Hours 800000 8000 100 500000 300000
Total 780000 420000

Calculation of Unit Cost of each Product

Particulars Product A Product B
Direct Material 300000 200000
Direct Labour 100000 50000
Overhead 780000 420000
Total Cost 1180000 670000
No. of Units 12000 10000
Unit Cost 98.33 67

b) Calculation of Unit Cost under One Plant Wide Rate:

Total Overheads= $1200000

Total Labour Hours= 30000

Overhead per Labour Hour= $40

Particulars Product A Product B
Material 300000 200000
Labour 100000 50000
Overhead $40*20000= $800000 $40*10000= $400000
Total Cost 1200000 650000
No of Units 12000 10000
Unit Cost 100 65

ekkarill92 answered 2 years ago
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