Question

Rapp Company is considering switching to an activity-based costing (ABC) system. The company produces and sells two products: LoEnd and HiEnd. The company consists of two departments: Production (where the products are made) and Marketing (which engages in selling and admin activity). The company's traditional costing system computes unit product costs as dictated by GAAP; direct labor hours (DLHs) are used as the allocation base for manufacturing overhead cost (the overhead rate is rounded to the nearest cent). The ABC system will include in unit costs all costs easily associated with units. In addition, in the ABC system, there are four major indirect activities: Machine Setups, Special Processing, General Factory, and Customer Relation (10% of Customer Relation cost relates to manufacturing and is incurred in the Production Department; the rest of the Customer Relation cost is incurred in the Marketing Department). In the ABC system, Customer Relation costs will be associated with customers; the rest of the costs will be associated with units of the two products Price Dm DLH Units Hourly Wage-DL Shipping Cost Hi end 200 72 2 5000 $20 $3 Low end 150 44 1 6000 $20 $1 OH Cost Low High total Machine Setup #of setups 360,000 40 120 160 Special Processing MH 300,000 8000 12000 20000 General Factory(Excluding customer relations) DLH's 144000 ? Customer Relations # of customers 200,000 5 What is the difference between the HiEnd product's unit costs computed by the traditional and ABC systems?

Answer 1

A. Traditional cost

Manufacturing OH = 360000+300000+144000+20000 = 824000

For Hiend = 824000*(2*5000)/16000 = 625000 (16000 is total labour hours)

For Lowend = 824000*(6000/16000) = 199000

Per unit costs

1. Hiend

Direct material = 72

Direct labour = 2*20 = 40

Shipping cost = 3

Manufacturing over heads = 625000/5000 = 125

Total = 240

2. Lowend

Direct material = 44

Direct labour = 1*20 = 20

Shipping cost = 1

Manufacturing over heads = 199000/6000 = 33.16

Total = 98.16

B. ABC cost

Manufacturing OH =

Machine oh =

lowend = 40/160*360000 = 90000

hiend = 120/160*360000 = 270000

Special machine hours =

lowend = 8000/20000*300000 = 120000

hiend = 12000/20000*300000 = 180000

general factory =

lowend =  144000*5000/11000 = 78546

hiend = 144000*5000/11000 = 65454

customer relations =

lowend = 20000*5/11 = 9090.91

hiend = 20000*6/11 = 11909.09

Total manufacturing costs under ABC

Lowend = 297636

Hiend = 527363

Per unit costs

1. Hiend

Direct material = 72

Direct labour = 2*20 = 40

Shipping cost = 3

Manufacturing over heads = 527363/5000 = 105.47

Total = 220.47

2. Lowend

Direct material = 44

Direct labour = 1*20 = 20

Shipping cost = 1

Manufacturing over heads = 297636/6000 = 49.606

Total = 114.606

Difference

Hiend = 240-220.47 = 19.53

Lowend = 114.606 - 98.16 = 16.446