Question

Problem 17-1A Comparing costs using ABC with the plantwide overhead rate LO P1, P3, A1, A2

The following data are for the two products produced by Tadros Company.

	Product A			Product B
Direct materials	$	14 per unit		$	27 per unit
Direct labor hours		0.5 DLH per unit			1.5 DLH per unit
Machine hours		0.4 MH per unit			1.1 MH per unit
Batches		105 batches			210 batches
Volume		10,000 units			2,000 units
Engineering modifications		9 modifications			45 modifications
Number of customers		500 customers			400 customers
Market price	$	35 per unit		$	95 per unit per unit

The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows.

	Costs			Driver
Indirect manufacturing
Engineering support	$	26,000		Engineering modifications
Electricity		24,800		Machine hours
Setup costs		40,000		Batches
Nonmanufacturing
Customer service		74,000		Number of customers
Required: (Round your per unit cost answers to 2 decimal places and other answers to nearest whole number. Loss amounts should be indicated with minus sign.) 1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct labor hours. 0 Overhead Assigned Activity Driver Plantwide OH rate Total Overhead Cost Units Produced OH Cost per unit Product A Product B Product A Product B 1.2 What is the gross profit per unit? Product A Product B Market price Gross profit per unit 2.1 How much gross profit is generated by each customer of Product A and Product B using the plantwide overhead rate? Product A Product B Gross profit per unit Units purchased per customer Gross profit per customer 2.2 What is the cost of providing customer service to each customer? 0 Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate? Product A Product B Gross profit per customer Customer service cost per customer Profit (loss) per customer Is the profit adequate? 3.1 Determine the manufacturing cost per unit of each product line using ABC. Engineering Support 0 Electricity 0 Setup 0 Overhead Assigned Activity Driver Activity rate Total Overhead Cost Product A Engineering support Electricity Setup $0 Product B Engineering support Electricity Setup $0 Total manufacturing costs Product A Product B Direct Materials per unit Direct Labor per unit Overhead per unit Total manufacturing cost per unit 3.2 What is the gross profit per unit? Product A Product B Market price (27.37) (85.57) 4.1 How much gross profit is generated by each customer of Product A and Product B using ABC? Product A Product B 0 Units purchased per customer Gross profit (loss) per customer 4.2 Is the gross profit adequate for each customer of Product A and B using ABC? Product A Product B Gross profit (loss) per customer Customer service cost per customer Profit (loss) per customer Is the profit adequate using ABC?

Answer 1

1) Direct Labor hours for product A = 10,000 units*0.5 DLH per unit = 5,000 hrs

Direct Labor hours for product B = 2,000 units*1.5 DLH per unit = 3,000 hrs

Overhead costs = Engineering support+Electricity+Setup costs

= $26,000+$24,800+$40,000 = $90,800

Calculation of manufacturing cost per unit using the plantwide overhead rate based on direct labor hours.
Overhead costs (A)	$90,800	(A/B) $11.35	per direct labor hour
Direct Labor Hours (B)	8,000 hrs
Overhead Assigned	Activity Driver (C)	Plantwide OH rate (D)	Total Overhead Cost (E = C*D)	Units Produced (F)	OH Cost per unit (E/F)
Product A	5,000	$11.35	$56,750	10,000	$5.67
Product B	3,000	$11.35	$34,050	2,000	$17.03
Total manufacturing cost per unit		Product A	Product B
Direct Material cost per unit		$14	$27
Direct Labor cost per unit		(0.50*$20) = $10	(1.50*$20) = $30
Overhead cost per unit		$5.67	$17.03
Total manufacturing cost per unit		$29.67	$74.03

1.2)

1.2 Calculation of gross profit per unit
		Product A	Product B
Market price		$35	$95
Manufacturing cost per unit		($29.67)	($74.03)
Gross profit per unit		$5.33	$20.97

2.1)

2.1 Calculation of gross profit generated by each customer of Product A and Product B using the plantwide overhead rate
		Product A	Product B
Gross profit per unit (A)		$5.33	$20.97
Units purchased per customer (B)		(10,000/500) = 20	(2,000/400) = 5
Gross profit per customer (A*B)		$106.60	$104.85

2.2)

2.2 Calculation of cost of providing customer service to each customer
Customer service costs (c)	$74,000	(c/d) $82.22	per customer
No. of customers (d)	900
Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate?
		Product A	Product B
Gross profit per customer		$106.60	$104.85
Customer service cost per customer		($82.22)	($82.22)
Profit (loss) per customer		$24.38	$22.63
Is the profit adequate?		Yes	Yes

3.1)

3.1 Calculation of manufacturing cost per unit of each product line using ABC.
Engineering Support
Cost (A)	$26,000	(A/B) $481.48	per modification
Engineering modifications (B)	(9+45) = 54
Electricity
Costs	$24,800	$4	per machine hour
Machine hours	6,200
Setup
Costs	$40,000	$126.98	per batch
Batches	(105+210) = 315
Overhead Assigned	Activity Driver		Activity rate		Total Overhead Cost
Product A
Engineering support	9	Modifications	$481.48	per modification	$4,334
Electricity	4,000	Machine hours	$4	per machine hour	$16,000
Setup	105	batches	$126.98	per batch	$13,333
Total Overhead costs (A)					$33,667
Units Produced (B)					10,000 units
Overhea cost per unit (A/B)					$3.37
Product B
Engineering support	45	Modifications	$481.48	per modification	$21,667
Electricity	2,200	Machine hours	$4	per machine hour	$8,800
Setup	210	batches	$126.98	per batch	$26,666
Total Overhead Costs (A)					$57,133
Units produced (B)					2,000 units
Overhea cost per unit (A/B)					$28.57
Total manufacturing costs		Product A	Product B
Direct Materials per unit		$14	$27
Direct Labor per unit		$10	$30
Overhead per unit		$3.37	$28.57
Total manufacturing cost per unit		$27.37	$85.57

3.2)

3.2 Calculation of gross profit per unit
		Product A	Product B
Market price		35	95
Manufacturing cost per unit		(27.37)	(85.57)
Gross Profit per unit		$7.63	$9.43
4.1 Gross profit generated by each customer of Product A and Product B using ABC
		Product A	Product B
Gross Profit per unit		7.63	9.43
Units purchased per customer		20	5
Gross profit (loss) per customer		152.60	47.15
4.2 Is the gross profit adequate for each customer of Product A and B using ABC?
		Product A	Product B
Gross profit (loss) per customer		152.60	47.15
Customer service cost per customer		(82.22)	(82.22)
Profit (loss) per customer		70.38	(35.07)
Is the profit adequate using ABC?		Yes	No