Question
In: Finance
You are cost manager at Pristine Ltd which is the region’s largest manufacturer of commercial and...
You are cost manager at Pristine Ltd which is the region’s
largest manufacturer of commercial and residential elegant cabinets
and wood works. Due to the competitive market and technological
advancements in almost every area of the business, the board of
directors from the input of division’s head and other senior
management, has decided to shift from traditional costing
techniques to activity based costing in order to arrive at more
accurate cost per unit especially for the cabinets which is the top
and most running product of the business. Activity based cost
management (ABCM) is one of many new financial and accounting tools
aimed at providing more complete, better-aligned data on economic
performance. Pristine Ltd is preparing two types of storage
cabinets, deluxe and executive and applies manufacturing overheads
to all units at the rate of $1.20 per machine hour. Production
information follows.
Deluxe ($) Executive ($)
Direct material cost 52.50 90.00
Direct labor cost 30.00 30.00
Budgeted volume (units) 8000 15000
The management accountant has determined that the firm’s
overhead can be identified with three activities which are
manufacturing setups, machine processing and product shipping. Data
on the number of setups, machine hours and outgoing shipments,
which are the activities’ three respective cost drivers,
follows.
Deluxe Executive Total
Setups 50 30 80
Machine hours 16000 22500 38500
Outgoing shipments 100 75 175
The firm’s total overhead of $4,620,000 is subdivided as
follows:
Manufactuing setups $1,008,000
Machine processing $2,772,000
Outgoing shipments $840,000
Total Overheads $4,620,000
Required:
a) Calculate the unit manufacturing cost of deluxe and
executive cabinets by using the company’s current overhead costing
procedures.
b) Calculate the unit manufacturing cost of deluxe and
executive cabinets by using activity based costing method.
c) Calculate the aggregate amount by which the deluxe cabinet
line is undercosted/overcosted by the company’s current traditional
overhead costing procedures. Then calculate the aggregate amount by
which the traditional system undercosts/overcosts the executive
cabinet line.
d) Assume that the current selling price of a deluxe cabinet
is $390 and the marketing manager is contemplating $45 discount to
stimulates sales. Is this discount advisable? Breifly
discuss.
Solutions
Expert Solution
| a | USING CURRENT OVERHEAD COSTING PROCEDURE | |||||||||
| Applied overhead rate/machine hour | $120 | (4620000/38500) | ||||||||
| Note: Overhead rate should be $120 | ||||||||||
| Deluxe | Executive | |||||||||
| A | Budgeted units of Production | 8000 | 15000 | |||||||
| B | Budgeted Machine hour | 16000 | 22500 | |||||||
| C=B/A | Machine hour per unit | 2.00 | 1.5 | |||||||
| D | Applied overhead rate/machine hour | $120.00 | $120.00 | |||||||
| E=C*D | Unit Overhead cost | $240.00 | $180.00 | |||||||
| F | Direct Material Cost | $52.50 | $90.00 | |||||||
| G | Direct Labor Cost | $30.00 | $30.00 | |||||||
| H=E+F+G | Unit Manufacturing Cost | $322.50 | $300.00 | |||||||
| X=A*E | Total Overhead allocation | $1,920,000 | $2,700,000 | |||||||
| b | USING ACTIVITY BASED COSTING METHOD | |||||||||
| I | J | K=I/J | ||||||||
| Activity | Overhead Cost | Total Cost drivers | Overhead Recovery rate | |||||||
| Manufacturing Setup | $1,008,000 | 80 | $12,600 | |||||||
| Machine Processing | $2,772,000 | 38500 | $72 | |||||||
| Outgoing shipment | $840,000 | 175 | $4,800 | |||||||
| Total | $4,620,000 | |||||||||
| L | M | N=L*M | P | Q=L*P | ||||||
| DELUX | EXECUTIVE | |||||||||
| Overhead Recovery rate | Cost drivers | Overhead Cost | Cost drivers | Overhead Cost | ||||||
| Manufacturing Setup | $12,600 | 50 | $630,000 | 30 | $378,000 | |||||
| Machine Processing | $72 | 16000 | $1,152,000 | 22500 | $1,620,000 | |||||
| Outgoing shipment | $4,800 | 100 | $480,000 | 75 | $360,000 | |||||
| Total | $2,262,000 | Total | $2,358,000 | $4,620,000 | ||||||
| Deluxe | Executive | |||||||||
| A | Budgeted units of Production | 8000 | 15000 | |||||||
| B | Budgeted Overhead Cost | $2,262,000 | $2,358,000 | |||||||
| E=B/A | Unit Overhead cost | $282.75 | $157.20 | |||||||
| F | Direct Material Cost | $52.50 | $90.00 | |||||||
| G | Direct Labor Cost | $30.00 | $30.00 | |||||||
| H=E+F+G | Unit Manufacturing Cost | $365.25 | $277.20 | |||||||
| c | X | Applied Overhead under traditiona process | $1,920,000 | $2,700,000 | ||||||
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