Question

In: Accounting

Company XYZ has two fixed price contracts for two different clients. The company has enough capacity...

Company XYZ has two fixed price contracts for two different clients. The company has enough capacity for both contracts but is uncertain whether they will be profitable.

Data as follows:

Customer                                  AAA                BBB

Component Type                         A999                B999

Contract Value($)                       $27,000            $100,000

Contract Quantity                      1,000 unit          2,000 units

Material cost/unit                        $15                  $20

Molding time/batch                     5 hours            7.5 hours         

Batch Size                                 100 units          50 units

Annual Budgeted overheads as follows:

Activity                                    Cost Driver                 Cost driver       Cost

                      volume/year   pool

Molding                                    Molding hours                2,000                $150,000

Inspection                                 Batches                        150                  $75,000

Production Mgmt                       Contracts                      20                    $125,000   

Calculate the activity-based costs and profits for each contract.

  

Solutions

Expert Solution

  • All working forms part of the answer
  • Workings:

Working

AAA

BBB

A

No. of units

1000

2000

B

Batch Size

100

50

C= A/B

No. of batches

10

40

D

molding time per batch

5

7.5

E = C x D

Total Molding hours

50

300

  • Calculation of Activity rate as per ABC method:

Activity

Cost driver

Cost driver

Cost

Activity Rate per cost driver

[A]

[B]

[B/C]

Molding

Molding Hours

2000

$         1,50,000.00

$                 75.00 per moulding hours

Inspection

Batches

150

$             75,000.00

$               500.00 per batch

Production management

Contracts

20

$         1,25,000.00

$           6,250.00 per contract

  • Overhead cost as per ABC for AAA:

Activity

Activity Rate per cost driver

No. of cost driver

Cost allocated

[A]

[B]

[A x B]

Molding

$                 75.00 per moulding hours

50 Molding Hours

$           3,750.00

Inspection

$               500.00 per batch

10 Batches

$           5,000.00

Production management

$           6,250.00 per contract

1 Contract

$           6,250.00

Total Overhead cost allocated

$         15,000.00

  • Overhead cost as per ABC for BBB:

Activity

Cost allocated

No. of cost driver

Cost allocated

[A]

[B]

[A x B]

Molding

$                 75.00 per moulding hours

300 Molding Hours

$         22,500.00

Inspection

40 Batches

$         20,000.00

Production management

$           6,250.00 per contract

1 Contract

$           6,250.00

Total Overhead cost allocated

$         48,750.00

  • Total Cost and Profits

Working

AAA

BBB

A

Contract Value

$                                 27,000.00

$         1,00,000.00

B = Material cost per unit x Units

Material cost

$                                 15,000.00

$             40,000.00

C [Allocated above]

Overheads allocated as per ABC

$                                 15,000.00

$             48,750.00

D = A - B - C

Profit (Loss) for contract

$                                 (3,000.00)

$             11,250.00


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