Question

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.

Answer 1

	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
jeff jeffy Next > < Previous Related Solutions Case Let Analysis: Oman Commercial Vehicle Manufacturer Company is one of the largest companies in the... Case Let Analysis: Oman Commercial Vehicle Manufacturer Company is one of the largest companies in the Sultanate of Oman. It is the third-largest manufacturer of passenger cars. Extensive quality enhancement and cost reduction task was initiated in September 2018. The outcome of this task helped the company to reach a profit of 28 million while the loss in the year ended March 2017 was 500 million. The company followed the cost cutting system and saved more than 300 million of... Fibre2Fashion Ltd. is the country’s largest manufacturer of spun yarn with well-established market. Fibre2Fashion Ltd. has... Fibre2Fashion Ltd. is the country’s largest manufacturer of spun yarn with well-established market. Fibre2Fashion Ltd. has good reputation for quality and service. Their marketing department identified that the potential for global market is expanding rapidly and hence the company undertook exercise for expansion of the capacity for export market. The company formed team of Marketing and Materials department to study the global logistics possibilities. After extensive study, the team came up with a report on global logistics and submitted that... Company G is America's largest manufacturer of both commercial and residential lawn mowing equipment. Company has... Company G is America's largest manufacturer of both commercial and residential lawn mowing equipment. Company has relied on comanpy B and company C (2 diffenrent vendors) to supply engines for the mowers. Company A views B & C as qualified and would chooses based on the availibility and pricing. Past year they purchased 80% from B and 20% from C. Company C aqcuired another engine company to increase its economies of scale. Later that year becasue of the possible enhanced... You are the manager in charge of the audit of Marfo Ltd, a company which manufacture... You are the manager in charge of the audit of Marfo Ltd, a company which manufacture biscuit and confectionery. You wish to employ a junior manager of staff to audit the trade creditors, accruals and provision as shown in the balance sheet at the year end and are in the process of preparing audit programme which clearly explain the purpose and the extent of the work at each stage of the audit. The draft figures for ‘creditors: amount falling due... You are the audit manager of ChefNZ Ltd, a large company, which runs a number of... You are the audit manager of ChefNZ Ltd, a large company, which runs a number of select gourmet restaurants throughout New Zealand. During the planning phase for the current year audit, you note the following information: Darcy Strong, the general manager has discovered a fraud involving the theft of more than $70,000 of cash. The person(s) who stole the cash were waiters/waitresses who simply pocketed any cash they received from restaurant customers and destroyed the manually generated hard copy bills... 1. Which of the following is likely to be the largest? A.) Cost of revenues B.)... 1. Which of the following is likely to be the largest? A.) Cost of revenues B.) Selling, General & Administrative C.) Amortization of Intangibles D.) Research & Development 2. Which of the following are non-cash expenses? A.) Cost of revenues B.) Selling, General & Administrative C.) Amortization of Intangibles D.) Research & Development 3. Which accounts may include depreciation? A.) Cost of Goods Sold B.) Selling, General & Administrative C.) Research & Development D.) All of the above You are the loan manager for a local commercial bank and was approached by the management... You are the loan manager for a local commercial bank and was approached by the management of Intel Corp.for a $150,000 loan to be used in the expansion of its business.  You requested and have received the following financial information to be used as the basis for your decision: Intel Corp. Income Statement Selected Financial FY 2017 FY 2018 FY 2019 EBIT        20,352        23,317        24,058 Interest Expense              349              126              484 Income Tax Expense        10,751           2,264           3,010 A. Please calculate the Times... You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company... You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company Local Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at $5 million, on the condition that OEL is satisfied with the financial records of Local. As Local is a small proprietary company, it has not prepared statutory financial reports or undergone an audit since its incorporation in 2016. However, Local has agreed to allow your firm, which is... You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company... You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company Local Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at $5 million, on the condition that OEL is satisfied with the financial records of Local. As Local is a small proprietary company, it has not prepared statutory financial reports or undergone an audit since its incorporation in 2016. However, Local has agreed to allow your firm, which is... The production manager of a clothing manufacturer estimates that the total annual cost of producing men’s... The production manager of a clothing manufacturer estimates that the total annual cost of producing men’s suits is given by the equation: C = 5,000 + 4,100Q – 4.4Q2 + .004Q3. What is the minimum price the firm can accept to not shut down in the short run? Hint: Write your answer to two decimal places. A firm produces 100 units of good A at a total cost of $1,500 and separately 200 units of good B at a cost... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Enumerations Create an advanced enumeration to represent months (JANUARY – DECEMBER) called enuMonths Add internal properties... What is the minimum size of the automorphism group of a simple directed graph having more... The birthday paradox says that the probability (chance) that two people in a room will have... #include <iostream> #include "lib.hpp" using namespace std; int main() {    // declare the bool bool... Why do we compare means instead of individual scores? for comparing average SAT test scores across... NPV Your division is considering two projects with the following cash flows (in millions):    0... The equivalent synchronous impedance of a 25kVA, 400V three-phase Y-connected synchronous generator is 0.05 + j1.6... ADVERTISEMENT About @ 2020 WizEdu