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In: Accounting

TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost...

Traditional Costing TRIX

Direct Materials $700

Direct Labour ($20/hour) $120

Manufacturing overhead ($38 per DLH) $228

Total per-unit cost $1, 048

In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.

Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers

Purchasing Number of orders $1,200,000 40,000

Machine setups Number of setups 900,000 18,000

Machining Machine hours 4,800,000 120,000

Quality Control Number of inspections 700,000 28,000

The cost drivers used:

Cost Drivers TRI-X Product

Purchase orders 17,000

Machine setups 5,000

Machine hours 75,000

Inspections 11,000

Required:

1. Calculate the activity rates for each of the overhead items using the four cost drivers.

2. Using the rates in (1) determine the unit cost for TRI-X.

3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.

SHOW YOUR WORKING

Solutions

Expert Solution

1. Rate of Each Overhead Items

Overheah Cost	Amount	Basis	No Of Activity	Price per Activity
PUrchasing Cost	1200000	No of Purchases	40000	30
Machine Set-up Cost	900000	No of Set ups	18000	50
Machining Cost	4800000	No of Machine Hours	120000	40
Quaility Cost	700000	No of Inspections	28000	25
Total				145

2. Calculation of unit cost for Product

Particulars	Amount
Direct Material (700*26000)	18200000
Direct labour (120*26000)	3120000
Purchasing Cost (30*17000)	510000
Machine Set Up (50*5000)	250000
Machining (40*75000)	3000000
Inspection Cost (25*11000)	275000
Total Cost of Production	25355000
Unit Produced	26000
Cost Per Unit	975.192

Notes: Overhead cost has been calculated on Actual basis considering the actual drivers used over estimated Overhead.

3. Calculation of Gross Profit

Particulars	Amount
Selling Price Per unit	1600
Cost Per unit as per Table 2 above	975.192
Gross Profit per Unit	624.808
No Of units	26000
Total Gross Profit	16245008

Advise: Compan should not discontinue the product as the company is earning $624.808 per unit of product which is $24.808 higher then their desired Gross profit i.e. $600 Per unit.

ekkarill92 answered 1 year ago

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