In: Accounting
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.
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 |