Question

XYZ Manufacturing makes two models of office chairs: regular and deluxe. Summary data for the two products showed the following:

Unit Costs                                                              Regular    Deluxe

      Direct materials                                                        $65.00           $105.00

      Direct labour ($20 per hour)                                      10.00                 20.00

      Manufacturing overhead*                                           4.80                   9.60

* Under the company's current costing, manufacturing overhead is allocated on the basis of direct labour-hours. The overhead for the year follows:

      Materials handling                                               $   300,000

      Setups                                                                        400,000

      General factory overhead                                          500,000

           Total                                                                 $1,200,000

The following table presents the activity levels that relate to the overhead costs:

      Cost Driver                       Regular           Deluxe            Total

      Number of parts               600,000            900,000        1,500,000

      Number of setups                       75                      50                  125

      Direct labour-hours              45,000              80,000           125,000

The market price for the regular chairs is $ 104 with expected sales of 40,000 units. The company expects to sell 25,000 deluxe chairs at a selling price of $170 per unit.

Required:

Determine the unit gross profit for the regular chair using both traditional and activity-based costing methods.

Answer 1

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XYZ manufacturing
Calculation of plant wide OH Rate	Regular	Deluxe	Total	Note
Total Direct Labor Hours	45,000.00	80,000.00	125,000.00	B
Total overhead			1,200,000.00	See A
Plant wide OH Rate			9.60	C=B/A
Allocated OH	432,000.00	768,000.00	1,200,000.00	D=C*B
Workings	Regular	Deluxe	Note
Units sold	40,000.00	25,000.00	E
Sell price	104.00	170.00	F
Revenue	4,160,000.00	4,250,000.00	G=E*F
Direct materials per unit	65.00	105.00	Q
Direct materials cost	2,600,000.00	2,625,000.00	R=E*Q
Direct labor per unit	10.00	20.00	S
Direct labor cost	400,000.00	500,000.00	T=E*S
Final Answer	Regular	Deluxe	Note
Revenue	4,160,000.00	4,250,000.00	See G
Less:
Direct Materials	2,600,000.00	2,625,000.00	See R
Direct Labor	400,000.00	500,000.00	See S
Allocated OH	432,000.00	768,000.00	See D
Total costs	3,432,000.00	3,893,000.00	H
Gross Profit	728,000.00	357,000.00	I=G-H
Gross Profit per unit	18.20	14.28	J=I/E
Calculation of ABC rates for overhead		See A	K	L=A/K
Activity cost pool	Activity Measure	Cost	Activity usage	ABC rates
Material Handling	Number of Parts	300,000.00	1,500,000.00	0.20
Setups	Number of Setups	400,000.00	125.00	3,200.00
General Factory Overhead	Direct Labor Hours	500,000.00	125,000.00	4.00
Total Cost assigned		1,200,000.00
Regular		See L	M	N=L*N
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Material Handling	Number of Parts	0.20	600,000.00	120,000.00
Machine Setup	Number of Setups	3,200.00	75.00	240,000.00
General Factory Overhead	Direct Labor Hours	4.00	45,000.00	180,000.00
Total Cost assigned				540,000.00
Deluxe		See L	O	P=O*L
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Material Handling	Number of Parts	0.20	900,000.00	180,000.00
Machine Setup	Number of Setups	3,200.00	50.00	160,000.00
General Factory Overhead	Direct Labor Hours	4.00	80,000.00	320,000.00
Total Cost assigned				660,000.00
Final Answer	Regular	Deluxe	Total
Revenue	4,160,000.00	4,250,000.00	8,410,000.00
Less:
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