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

Ans.
						(Amount In $)
Statement showing gross margin per unit for each product under the traditional costing.
Particular		Poppy seed			Blueberry
Direct material per unit			0.75			0.85
Direct labor cost per unit			0.25			0.25
Prime cost per unit			1			1.1
Overhead cost Per unit			0.64			0.24
(working note 1)
Total Cost per unit		(1+0.64)	1.64		(1.10+0.24)	1.34
Sales Prise Per Unit			2.5			2.5
Margin Per Unit			0.86			1.16
						(Amount In $)
Statement showing gross margin per unit for each product under the ABC costing.
Particular		Poppy seed			Blueberry
Direct material per unit			0.75			0.85
Direct labor cost per unit			0.25			0.25
Prime cost per unit			1.00			1.10
Overhead cost Per unit as per ABC			0.42			0.40
(working note 2)
Total Cost per unit		(1+0.42)	1.42		(1.10+0.40)	1.50
Sales Prise Per Unit			2.50			2.50
Margin Per Unit			1.08			1.00
						(Amount In $)
Statement Showing Compare the gross margin of each product under the traditional system and ABC.
Particular		Poppy seed			Blueberry
Gross Margin as per traditional system			0.86			1.16
Gross Margin as per ABC			1.08			1
Difference In Gross Margin		(0.86-1.08)	-0.22		(1.16-1.00)	0.16
Working note - 1
Overhead cost per unit as per traditional Cost method					(Amount In $)
		Poppy seed			Blueberry
overhead cost
(allocated in machine hours 1500:750)		(A)	90000		45000
No of Unit		(B)	140000		190000
Overhead cost per unit		(A)/(B)	0.64		0.24
working note -2
allocation of overhead as per cost Drivers					(Amount In $)
	Total Cost	Poppy seed			Blueberry
Set Up Cost	50000		20000		30000
(allocatited in no of setup 40:60)		(50000/100*40)		(50000/100*60)
Quality Control	28300		4994.12		23305.88
(allocatited in no of inspection 75:350)		(28300/425*75)		(28300/425*350)
Maintenance Cost	37800		25200		12600
(allocatited in no of machine hours			(37800/2250*1500)		(37800/2250*750)
1500:750)
engineering cost	18900		9100		9800
(allocatited in no of Eng. Hours 65:70)		(18900/135*65)		(18900/135*70)
Total Overhead Cost		(A)	59294.12		75705.88
No Of Unit		(B)	140000		190000
Overhead Cost Per Unit		(A)/(B)	0.42		0.40
Advantage of ABC. 1. Activity Based Costing helps to reduce costs by providing meaningful information on the opportunities available for reducing costs. 2. Activity Based Costing is working only on the activities. Hence, the management can take the quality decision by knowing the nature of each activity. 3. The activities can be classified into two i.e. value adding activities and non-value adding activities. The Activity Based Costing helps the management on focusing the forces on value adding activities and eliminate non-value adding activities. 4. The accurate allocation of costs to various products leads to proper pricing policy. 5.The management can take make or buy decisions by considering the cost of manufacture of a product or sub contract the same with an outside agency through Activity Based Costing analysis. Disadvantage Of ABC. 1. Activity Based Costing is not useful to small companies. 2. If the overheads are relatively small, there is no use of Activity Based Costing. 3. Some companies are producing only one product or few products. If so, the Activity Based Costing cannot be applied. 4. Activity Based Costing method should not be used to prepare monthly profit statements.