Question

KPhone produces quality smart phones. Its factory produces two popular models: the KPhone Pro and the KPhone Pro Max. At the beginning of the year, the following planned production information was tabled to assist in cost planning:

	Pro Max	Pro
Quantity planned	100,000	800,000
Selling Price	$1,650.00	$900.00
Unit prime cost	$530.00	$483.00

In addition, the following information was provided for calculating overhead costs for each phone.

Activity Name	Activity Driver	Total Activity Cost	Pro Max	Pro
Setups	Number of setups	$14,000,000.00	500	200
Machining	Machine hours	$65,000,000.00	100,000	400,000
Engineering	Engineering hours	$10,000,000.00	100,000	200,000
Packing	Packing orders	$1,000,000.00	100,000	800,000

Required:

Using activity based costing, calculate the overhead rates for each activity. Using activity based costing, calculate the per-unit cost for each product (rounding to the nearest dollar). Assume that instead of activity based costing, overhead was allocated on the basis of machine hours. Now calculate the per-unit cost for each product (rounding to the nearest dollar) and explain the difference in the per-unit product costs.

Answer 1

Part 1
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Setup	$           14,000,000	700	$                                        20,000.00	per Setup
	Machining	$           65,000,000	500,000	$                                             130.00	per MHs
	Engineering	$           10,000,000	300,000	$                                   33.33333333	Per engineering hours
	Packing	$             1,000,000	900,000	$                                     1.11111111	per packing order
	Total Overhead Cost	$           90,000,000
			Pro Max	Pro
		ABC Rate	Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Setup	$             20,000.00	500	$                                      10,000,000	200	$                              4,000,000
	Machining	$                  130.00	100000	$                                      13,000,000	400000	$                            52,000,000
	Engineering	$          33.3333333	100000	$                                        3,333,333	200000	$                              6,666,667
	Packing	$            1.1111111	100000	$                                           111,111	800000	$                                 888,889
	Total Overhead Cost allocated			$                                      26,444,444		$                            63,555,556
	Calculation of Unit Product Cost
		Pro Max	Pro
	Unit Prime Cost	$                       530	$                                      483
	Unit Overhead Cost(Overhead Cost allocated/units planned to sold)	$                       264	$                                        79
	Unit Product Cost	$                       794	$                                      562
Part 2	Total Overhead Cost =$90,000,000
	Total Machine Hours =500,000 MHs
	Plantwide Overhead rate =$90,000,000 / 500,000 MHs =$180 per MHs
	Overhead Cost allocated to Pro Max =100,000*$180 =$18,000,000
	Overhead Cost allocated to Pro =400,000*$180 =$72,000,000
	Calculation of Unit Product Cost
		Pro Max	Pro
	Unit Prime Cost	$                       530	$                                      483
	Unit Overhead Cost(Overhead Cost allocated/units planned to sold)	$                       180	$                                        90
	Unit Product Cost	$                       710	$                                      573