Question

Shelby Boutique Dress produces two product lines: T-shirts and Sweatshirts. Recent Product Profitability Report prepared by the accountant follows:

                                                                                                      T-SHIRTS                SWEATSHIRTS

Production and sales volume units                                                   60,000                      35,000

Selling price                                                                                       $17.00                     $30.00    

Direct material                                                                                   $2.50                         $6.20

Direct labor                                                                                         $4.50                         $7.22

Factory overhead                                                                                $2.55                         $4.08

Cost per Unit (cost to make a unit)                                                      $9.55                         $17.50

Gross profit (price minus unit cost)                                                      $7.45                         $12.50

Selling and administrative costs                                                           $4.00                          $7.00      

Profit per unit                                                                                         $3.45                         $5.50

Tom, the manager in charge of Sweatshirt operation, has raised concerns about the credibility of the accountant’s Product Profitability Report.   Specifically, Tom believes that:

(1) Each Sweatshirt costs less to make than what has been reported $17.50; and (2) Each Sweatshirt has more profit per unit than the $5.50 shown in the report.  

As a result, the price set for Sweatshirt is less competitive affecting sales units. Furthermore, this issue has affected negatively the moral of the employees working in Sweatshirts’ operations.

Shelby Boutique Dress has hired Sherry, a Clayton State graduate, to look at the matter. Sherry has stated that the problem could be due to the allocation of factory overhead cost and/or the allocation of selling and administrative costs, because both of them contain indirect costs that are not traceable, thus requiring arbitrary allocations.  

Upon preliminary study, Sherry has decided to revise the allocation of factory overhead costs using Activity Based Costing based on the following two activities – Supervision and Inspection activities. The following data has been compiled for this purpose:

Activity                            Activity cost        Activity-cost driver

Supervision                      $130,500               # of direct labor hours

Inspection                         $165,300               # of Inspections            

Total factory overhead     $295,800

      Activities demanded by Product Line  

T-SHIRTS                                                 SWEATSHIRTS

0.75 DLH per unit                                       1.2 DLH per unit

60,000 inspections                                      22,650 inspections

Requirements:

a. Using ABC for the allocation of factory overhead costs, what would be the cost of production per unit and the amount of profit per unit of T-shirts?

b. Using ABC for the allocation of factory overhead costs, what would be cost of production and the amount of profit per unit of Sweatshirts?

Answer 1

		T Shirts	SweatShirts
	Production & Sales	60000	35000
	Selling Price	17.00	30.00
	DM	2.50	6.20
	DL	4.50	7.22
	F OH	2.55	4.08
	Cost to Produce	9.55	17.50
	GP	7.45	12.50
	S&A Cost	4.00	7.00
	Profit PU	3.45	5.50
	Allocated F OH	153000	142800	295800
	Activity	Activity Cost	Activity Cost Driver
	Supervision	130500	DLH
	Inspection	165300	Inspection No
	Total	295800
		T Shirts	SweatShirts
	DLH	0.75	1.20
	Inspection	60000	22650
	DLH	45000	42000	87000
	(DLH PU *Sales Unit)
	Inspection	60000	22650	82650
1	Activity	Activity Cost	Activity Cost Driver	Total Factor	Per Driver
	Supervision	130500	DLH	87000	1.50
	Inspection	165300	Inspection No	82650	2.00
	Total	295800
		T Shirts	SweatShirts
	Production & Sales	60000	35000
	Selling Price	17.00	30.00
	DM	2.50	6.20
	DL	4.50	7.22
	Supervision Cost	1.125	1.80
	(DLH PU* Factor PU)
	Inspection Cost	2.00	1.29
	(Per Driver* No of Inspe/Units)
	Cost to Produce	10.13	16.51
	GP	6.88	13.49
	S&A Cost	4.00	7.00
	Profit PU	2.88	6.49