Question

ABC, product line costing. PTech Ltd. manufactures two models of cordless phones. The Family Friend model has features designed for a multiple-user family, including the ability to have multiple ring- tones and caller ID. The Office Assistant model is designed for use in home offices. Data regarding the two product lines are as follows:

Family Friend Office Assistant

Expected production 50,000 units 150,000 units

Direct materials cost $12.14 per unit $28.64 per unit

Direct labour cost $10.86 per unit $10.86 per unit

PTech is considering implementing an activity-based costing (ABC) system in its plant and has identi- fied four primary activities. Data on these activities are as follows:

Family Friend Office Assistant Budget Cost

Equipment setup 50 setups 30 setups $44000

Machine processing 30,000 machine-hours 220000 machine hours 875,000

Quality control 5,000 inspection-hours 10,000 inspection hours 630,000

Packaging/shipping 1 25 shipments 75 shipments 80,000

1. Calculate the manufacturing overhead allocation rate for each activity using ABC.

2. Compute the unit cost of each model of phone using ABC.

3. Assume the company currently allocates overhead on the basis of direct labour costs. Compute the

unit cost of each model of phone using this method.

4. Compare the unit costs of each model calculated in requirements 2 and 3. Comment on your results

Answer 1

STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Equipment setup			Setups	44000	80	550
Machine processing			machine hours	875,000	250,000	3.5
Quality control			Inspection Hours	630,000	15,000	42
Packagin/ Shipping			Shipments	80,000	200	400
Activity cost allocation:
Activity		Rate	family Friend		office Assitant
			Activity	OH	Activity	OH
Equipment setup		550	50	27500	30	16500
Machine processing		3.5	30000	105000	220000	770000
Quality control		42	5000	210000	10000	420000
Packagin/ Shipping		400	125	50000	75	30000
	Total Activity cost			392500		1236500
	Divide: Number of units			50000		150000
	Activity cost per unitt			7.85		8.24
Unit Product cost
		family friend		Office Assitant
Direct material		12.14		28.64
Direct labourr		10.86		10.86
Activity cost		7.85		8.24
Unit ptoduct cosst		30.85		47.74
Traditional cost:
Total labour cost (200,000 total units @10.86)					2172000
Total Overheads					1629000
OH rate based on labour cost					75%
Unit product cost
		family friend		Office Assitant
Direct material		12.14		28.64
Direct labourr		10.86		10.86
Activity cost @75% of DLC		8.145		8.145
Unit ptoduct cosst		31.145		47.645
Comparison:
			family friend		Office Assitant
Unit cost per ABC			30.85		47.74
Unit cost as per Traditional			31.145		47.645
Difference			-0.295		0.095
Under ABC costing, the unit cost is more accurate estimate.