Question

Muffintop Company makes two types of snack cake, the poppy seed and the blueberry. Basic production information follows:

                                                                                                Poppy seed                        Blueberry

Direct materials cost per unit    $0.75                                    $0.85

Direct labor cost per unit    $0.25                                    $0.25

Sales price per unit $2.50                                    $2.50

Expected production per month 140,000 units                  190,000 units

Muffintop has monthly overhead of $135,000, which is divided into the following cost pools:

Setup costs                              $50,000

Quality control                            28,300

Maintenance                                37,800

Engineering                                 18,900

Total                                        $135,000

The company has also compiled the following information about the chosen cost drivers:

                                                                        Poppy seed           Blueberry               Total

Number of setups required 40                         60                     100

Number of inspections    75                      350                     425

Number of machine hours    1,500                      750                  2,250

Number of Engineering hours    65                        70                     135

Required:

a)      Calculate Muffintop’s gross margin per unit for each product under the traditional costing system. The cost driver for the overhead in the traditional method is machine hours.

b)      Calculate Muffintop’s gross margin per unit for each product under the activity based costing system.

c)      Compare the gross margin of each product under the traditional system and ABC.

d)      Explain the pros and cons of using activity based costing.

Answer 1

;a) Gross Margin Per Unit Under Traditional costing System

	Puppy Seed	Bluberry
Sales Price per Unit	2.5	2.5
Less: Direct material	0.75	0.85
Less: Direct labour	0.25	0.25
(A)	1.5	1.4
Expected Production (B)	140000	190000
(A) x (B) = (C)	210000	266000
Less: Overhead (D)
(135000x1500/2250)	90000
(135000x750/2250)		45000
Gross Contribution margin (C) - (D) = (E)	120000	221000
Gross Contribution margin per Unit (E)/(B)	0.8571	1.1631

The overhead of 135000 is apportioned based on the machine hours used in the department

b) Activity based costing system

Activity Cost Pool	Cost driver	Ratio	Total Amount	Puppy seed	Blueberry
Setup costs		40:60	50000	20000	30000
Quality control		75:350	28300	4995	23305
Maintenance		1500:750	37800	25200	12600
Engineering		65:70	18900	9100	9800
Total Activity Cost				59295	75705
Quantity Produced				140000	190000
Unit Cost				0.4235	0.3984
Add: Conversion Cost	( 0.75+0.25)			1.00
	(0.85+0.25)				1.1
Total				1.4235	1.4984
Sales Price				2.5	2.5
Gross Margin per unit				1.0016	1.0765

c) Comparison of Gross margin under both the systems

	Puppy Seed	Blueberry
Traditional systems	0.8571	1.1631
Activity based costing system	1.0016	1.0765

d)

The problems and consequenses of using ABC are listed below

1. The information generated by the ABC may not be always in confirmation with the generally accepted accounting principles

2. Identifying the cost driver and collecting data for the same is a very time consuming process

3. The information generated by the ABC may be in conflict with the managerial performance standards established by the traditional system

4. Its is not usefull for all companies where Overhead costs are very less to compared with operating cost