Question

The following data are for the two products produced by Tadros Company.

	Product A			Product B
Direct materials	$	14 per unit		$	24 per unit
Direct labor hours		0.6 DLH per unit			1.5 DLH per unit
Machine hours		0.5 MH per unit			1.1 MH per unit
Batches		125 batches			250 batches
Volume		10,000 units			2,000 units
Engineering modifications		10 modifications			50 modifications
Number of customers		500 customers			400 customers
Market price	$	34 per unit		$	95 per unit per unit

The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows.

	Costs			Driver
Indirect manufacturing
Engineering support	$	22,500		Engineering modifications
Electricity		28,800		Machine hours
Setup costs		41,000		Batches
Nonmanufacturing
Customer service		74,000		Number of customers

Required:

(Round your per unit cost answers to 2 decimal places and other answers to nearest whole number. Loss amounts should be indicated with minus sign.)

1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct labor hours. 0 Overhead Assigned Activity Driver Plantwide OH rate Total Overhead Cost Units Produced OH Cost per unit Product A Product B Product A Product B 1.2 What is the gross profit per unit? Product A Product B Market price Gross profit per unit 2.1 How much gross profit is generated by each customer of Product A and Product B using the plantwide overhead rate? Product A Product B Gross profit per unit Units purchased per customer Gross profit per customer 2.2 What is the cost of providing customer service to each customer? 0 Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate? Product A Product B Gross profit per customer Customer service cost per customer Profit (loss) per customer Is the profit adequate? 3.1 Determine the manufacturing cost per unit of each product line using ABC. Engineering Support 0 Electricity 0 Setup 0 Overhead Assigned Activity Driver Activity rate Total Overhead Cost Product A Engineering support Electricity Setup $0 Product B Engineering support Electricity Setup $0 Total manufacturing costs Product A Product B Direct Materials per unit Direct Labor per unit Overhead per unit Total manufacturing cost per unit 3.2 What is the gross profit per unit? Product A Product B Market price (29.74) (81.44) 4.1 How much gross profit is generated by each customer of Product A and Product B using ABC? Product A Product B 0 Units purchased per customer Gross profit (loss) per customer 4.2 Is the gross profit adequate for each customer of Product A and B using ABC? Product A Product B Gross profit (loss) per customer Customer service cost per customer Profit (loss) per customer Is the profit adequate using ABC?

5. Which method of product costing gives better information to managers of this company?

Departmental overhead rate method

Activity-based costing method

Plantwide overhead rate method

Answer 1

Solution 1.1:

Computation of overhead rate and Overhead assignment to product - (Plantwide overhead rate)
Particulars	Product A	Product B	Total
Direct labor hours per unit	0.6	1.5
Volume (In Units)	10000	2000
Direct Labor hours	6000	3000	$9,000.00
Manufacturing overhead			$92,300.00
Overehead rate - Per direct labor dollar (Manufacturing overhead/Direct labor)			$10.26
Overhead allocation	$61,533	$30,767	$92,300
Overhead cost per unit	$6.15	$15.38

Computation of per unit cost (Plantwide overhead rate)
Particulars	Product A	Product B
Direct material	$14.00	$24.00
Direct Labor	$12.00	$30.00
Manufacturing overhead	$6.15	$15.38
Unit product cost	$32.15	$69.38

Solution 1.2 and 2.1:

Computation of Gross Profit Per unit & Gross Profit generated by each customer (Planwide overhead rate)
Particulars	Product A	Product B
Selling Price	$34.00	$95.00
Product cost	$32.15	$69.38
Gross Profit Per unit	$1.85	$25.62
Volume	10000	2000
Number of customer	500	400
Units purchased per customer	20	5
Gross Profit per customer	$36.93	$128.08

Solution 2.2:

Computation of cost of providing customer service to each customer & Adequacy of Gross Profit
Particulars	Product A	Product B	Total
Customer service cost			$74,000.00
Number of customer	500	400	900
Cost of customer service to each customer			$82.22
Gross Profit per customer	$36.93	$128.08
Cost of customer service to each customer	$82.22	$82.22
Profit (Loss) per customer	-$45.29	$45.86
Is the profit adequate	No	Yes

Solution 3.1:

Computation of overhead assigned to product & Overehead cost per unit- Activity Based Costing
Activity	Cost	Cost Driver	Qty of cost driver	Allocation rate	Product A		Product B
					Allocation Qty	Allocated Overhead	Allocation Qty	Allocated Overhead
Engineering Support	$22,500.00	Engineering Modification	60	$375.00	10	$3,750.00	50	$18,750.00
Electricity	$28,800.00	Machine hours	7200	$4.00	5000	$20,000.00	2200	$8,800.00
Setup Cost	$41,000.00	Batches	375	$109.33	125	$13,666.67	250	$27,333.33
Total	$92,300.00					$37,416.67		$54,883.33
Volume (In units)						10000		2000
Overhead cost per unit						$3.74		$27.44

Computation of per unit cost (ABC)
Particulars	Product A	Product B
Direct material	$14.00	$24.00
Direct Labor	$12.00	$30.00
Manufacturing overhead	$3.74	$27.44
Product cost	$29.74	$81.44

Solution 3.2 and 4.1:

Computation of Gross Profit Per unit & Gross Profit generated by each customer (ABC)
Particulars	Product A	Product B
Selling Price	$34.00	$95.00
Product cost	$29.74	$81.44
Gross Profit Per unit	$4.26	$13.56
Volume	10000	2000
Number of customer	500	400
Units purchased per customer	20	5
Gross Profit per customer	$85.17	$67.79

Solution 4.2:

Computation of adequacy of Gross Profit
Particulars	Product A	Product B
Gross Profit per customer	$85.17	$67.79
Cost of customer service to each customer	$82.22	$82.22
Profit (Loss) per customer	$2.95	-$14.43
Is the profit adequate	Yes	No

Solution 5:

Activity based costing method gives better information ot manager of this company