Question

Speedo Co. assembles three types of motorcycle at the same factory: the 50cc Fast; the 250cc Quickie and the 1000cc Zoom. It sells the motorcycles throughout the world. In response to market pressures Speedo Co. has invested heavily in new manufacturing technology in recent years and , thus, has significantly reduced the size of its workforce. Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing Activity Based Costing (ABC). Speedo Co's accountant has produced the following analysis.

	Annual output (units)	Annual direct labour hours	Selling price ($ per unit)	Raw material cost ($ per unit)
Fast	2000	200,000	4,000	400
Quickie	1600	220,000	6,000	600
Zoom	400	80,000	8,000	900

The three cost drivers that generate overheads are:

1. Deliveries to retailers-the number of deliveries of motorcycles to retail showrooms

2. Set-ups-the number of times the assemby line process is re-set to accommodate a production run of a different type of motorcycle

3. Purchase orders-the number of purchase orders.

The annual cost driver volumes relating to each activity and for each type of motorcycle are:

	Number of deliveries to retailers	Number of set-ups	Number of purchase orders
Fast	100	35	400
Quickie	80	40	300
Zoom	70	25	100

The annual overhead costs relating to these activities are as follows:

Deliveries to retailers 2,400,000

Set-up costs 6,000,000

Purchase orders 3,600,000

All direct labour is paid at $5 per hour. The company holds no inventories

Required:

Calculate the total profit on each of Speedo Co's three types of product using each of the following methods to attribute overheads:

(i) the existing method based upon labour hours

(ii) activity based costing.

Answer 1

Answer i.
Predetermined Overhead Rate = $12,000,000 (Total Overhead) / 500,000 DLH
Predetermined Overhead Rate = $24 per DLH
Income Statement
Under Traditional Method
	Fast	Quickie	Zoom
Sales in Units	2,000.00	1600	400
SP per Unit	4,000.00	6000	8000
Sales In $	8,000,000.00	9,600,000.00	3,200,000.00
Direct Materials	800,000.00	960,000.00	360,000.00
Direct Labor	1,000,000.00	1,100,000.00	400,000.00
Factory Overhead	4,800,000.00	5,280,000.00	1,920,000.00
Total Costs	6,600,000.00	7,340,000.00	2,680,000.00
Net Operating Income	1,400,000.00	2,260,000.00	520,000.00
Answer ii.
Activity	Overhead	Cost Driver Quantity		Allocation Rate
Indirect Costs
Deliveries to retailers	2,400,000	250	Deliveries	9,600.00	per delivery
Set up Costs	6,000,000	100	setups	60,000.00	per setup
Purchase Orders	3,600,000	800	purchase orders	4,500.00	per purch. Order
Total	12,000,000
Assigning Overhead Cost to Product Model
Using ABC Method
	Activity Based Overhead Rate		Fast			Quickie			Zoom.
			Cost Driver Incurred		OH Allocated	Cost Driver Incurred		OH Allocated	Cost Driver Incurred		OH Allocated
Deliveries to retailers	9,600.00	per delivery	100	Deliveries	960,000	80	Deliveries	768,000	70.00	Deliveries	672,000.00
Set up Costs	60,000.00	per setup	35	setups	2,100,000	40	setups	2,400,000	25.00	setups	1,500,000.00
Purchase Orders	4,500.00	per purch. Order	400	purchase orders	1,800,000	300	purchase orders	1,350,000	100.00	purchase orders	450,000.00
Total Indirect Cost					4,860,000			4,518,000			2,622,000
Income Statement
Under Traditional Method
	Fast	Quickie	Zoom
Sales in Units	2,000.00	1600	400
SP per Unit	4,000.00	6000	8000
Sales In $	8,000,000.00	9,600,000.00	3,200,000.00
Direct Materials	800,000.00	960,000.00	360,000.00
Direct Labor	1,000,000.00	1,100,000.00	400,000.00
Factory Overhead	4,860,000.00	4,518,000.00	2,622,000.00
Total Costs	6,660,000.00	6,578,000.00	3,382,000.00
Net Operating Income	1,340,000.00	3,022,000.00	(182,000.00)