Question

1. Activity Based Costing

Duncan Company recently introduced a markers to complement their other product, pencils. Accountants accumulate all overhead in a single cost pool and allocate it based on machine-hours. With the recent addition of an expanded computer system, Duncan decided to begin implementing ABC. A study reveals much overhead cost related to machine setups and batch changes. They select the number of setups and the number of batch changes as the activity driers for the two new cost pools. They will continue to use machine-hours as the base for allocating all remaining overhead. Accountants provide the following information about Duncan Company’s most recent year of operations:

                                                                Pencils                      Markers                              Total

Units produced                                           5,000 1,000                            6,000

Direct material cost per unit               $            5 $      3                  

Direct labor cost                                    200,000 $300,000                     $500,000

Machine hours                                           4,000 6,000                          10,000

Machine setups                                               30 50                                 80

Batch changes                                               300 700                            1,000

Overhead:

            Machine setup-related                                                                                     $   200,000

            Batch-related                                                                                                        500,000

            Other                                                                                                               1,500,000

                                                                                                                                    $2,200,000

                                                                                                                                    ========   

Required:

Using the current costing system (Absorption costing), determine the total and unit cost for each product line.

Using the ABC costing system, determine the total and unit cost for each product line.

If you were the manager of the pencil department, which method would you prefer and why?

Product Costs using the Current Costing System

(Absorption Costing)

OHR =

                                 Pencils Markers Total

Direct Material       $                                              $ $

Direct Labor

Overhead                                         

(OHR x AV)

Total Cost            $ $ $

                                                                                      =======

÷Units produced                                          

Cost per unit

                             =======             =======            

Product Costs using the ABC Costing System

         OHR #1 = ____________ =                               

        

OHR #2 = ____________ =                               

        

OHR #3 = ____________ =                               

                                 Pencils              Markers               Total

Direct Material       $                                              $                                              $

Direct Labor

Overhead                                         

(OHR x AV)

                                                                                                  

Total Cost            $                           $                           $

                                                                                      

÷Units produced =======

Cost per unit

       =======             =======

Answer 1

Product Costs using the Current Costing System​ (Absorption Costing

OHR =​Total overhead/Mechine hours

​ =    $2,200,000/10,000HOURS

   =    220$ PER HOUR

	Pencils $	Markers $	Total $
Direct Material	5000*5=25,000	1000*3=3,000	28,000
Direct Labor	2,00,000	3,00,000	5,00,000
Overhead    (OHR x MECHINE HOURS)	8,80,000	13,20,000	22,00,000
Total Cost	11,05,000	16,23,000	27,28,000
÷Units produced	5000 units	1000 units	6000units
Cost per unit $	221	1623	455

Product Costs using the ABC Costing System​

   OHR #1 = Machine setup-related /no.of set up= $ 200,000/80setups

=$2,500 per set up

   OHR #2 = Batch-related/no.of batchs = $500,000/1000 batchs

   =$500 per batch   

OHR #3 =OTHRS/ Machine hours = 1,500,000/10,000hours

=150$ per mechine hour

	Pencils $	Markers $	Total $
Direct Material	5000units*5$=25,000	1000units*3$=3,000	28,000
Direct Labor	2,00,000	3,00,000	5,00,000
Overhead  ​cost
setup related cost	30setups*$2500=75,000	30setups*$2500=1,25000	2,00,000
Batch changes realated	300batchs*$500=1,50,000	700Batchs*$500=3,50,000	5,00,000
other over head cost	4000hours*150$=6,00000	6000hours*150$=9,00,000	15,00,000
Total Cost	10,50,000	16,78,000	27,28,000
÷Units produced	5000	1000	6000
Cost per unit $	210	1678	455

DECESSION

• ​If i am the manager of pencil department should prefer activity based costing system
• ​because it results Reduction in cost of overhead by 55,000$ (8,80,000-,8,25,000)
• ​so product cost reduced by 11$ per unit (55,000$/5000units)