Question

Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy.​ Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit product costs.

Activity Cost Driver Cost

Assembly DL hours logged $500

Machining Machine hours logged ​$1,500

Setting Up Equipment Number of setups ​$1,200

Product Movement Number of Moves ​$800

Each Acoustic guitar requires 1 direct labor hour and 0.5 machine hours to produce. Each Electric guitar requires 0.8 direct labor hours and 0.4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during production in groups of 20​ guitars; Electric guitars are moved during production is groups of 25 guitars.

The direct material cost per Acoustic guitar is​ $60 and the direct material cost per Electric guitar is​ $70. Direct Laborers are paid at a rate of​ $25 per hour. The projected production levels for the period are 20 Acoustic guitars and 100 Electric guitars.

The total per unit cost of the acoustic line under the traditional​ (current) system is . . . . . . . . . . . . . .

The total per unit cost for the electric line under the activity based costing​ (proposed) system is . . . . . . . ​(round to the nearest​ dollar)

The total amount by which each product line is​ over/undercosted is . . . . . . . . . . .

Answer 1

Solution:

The total cost per unit of the acoustic line under the traditional system:

Total cost per unit –

Total cost per unit:
Direct materials	$60
Direct labor	$25	($25 per hour x 1 direct labor hour)
MOH	$40	(applied based on direct labor hour)
Total cost per unit:	$125

Electric cost per unit -
Direct material	$70
Direct labor	$20	($25 x 0.8 DL hours)
MOH	$32	($40 x 0.8 DL hours)
Total cost	$122

Note – Manufacturing overhead is applied on the basis of direct labor hour.

Total manufacturing overhead –

Assembly        $500

Machining       $1,500

Setting up Equipment $1,200

Product Movement     $800

Total MOH                 $4,000

Total direct labor hours           100

MOH per DL hour      $4,000/100 = $40 per DL hour

Computation of ABC cost per unit:

Acoustic Guitar –

Direct material            $60

Direct labor                 $25

MOH                           $58

Total cost per unit       $143

Acoustic - total MOH per unit under ABC System
Cost pool	cost per activity	usage	Cost per unit
Assembly	$5 per DL hour	1 hour per unit	$5 per unit
Machining	$30 per MH	0.5 MH per unit	$15 per unit
Setting up	$150 per setup	5 units per setup	$30 per unit
Product movement	$160 per group	20 units per group	$8 per unit
Total MOH per unit			$58 per unit

Electric Guitar –

Direct material                        $70

Direct labor                             $20

MOH                                       $28.40

Total cost per unit                   $118.40

Total cost per unit rounded to nearest dollar value = $118

Electric Guitar - Total MOH per unit
Cost pool	cost per activity	usage	Cost per unit
Assembly	$5 per DL hour	0.8 DL hours	$4 per unit	$5 x 0.8
Machining	$30 per MH	0.4 MH per unit	$12 per unit	$30 x 0.4
Setting up	$150 per setup	25 units per setup	$6 per set	$150/25
Product movement	$160 per group	25 units per group	$6.40	$160/25
Total cost per unit:			$28.40

Basic Calculations – ABC system

Activity	Cost Driver	Cost Pool	Acoustic Guitar	Electric Guitar	Total Activity	Cost per activity
Assembly	DL hours	$500	20 DL Hours	80 DL Hours	100 DL Hours	$5 per DL hour
Machining	Machine hours	$1,500	10 MH	40 MH	50 MH	$30 per MH
Setting Up Equipment	Number of setups	$1,200	4 setups	4 setups	8 setups	$150 per setup
Product Movement	Number of moves	$800	1 group	4 group	5 groups	$160 per group

Comparison of total cost per unit of both acoustic and electric guitars under Traditional and ABC costing methods:

Acoustic Guitar –

Traditional cost per unit          $125

ABC cost per unit                   $143

Product undercosted               $18

Hence, acoustic guitar is under costed by $18 per unit.

Total undercosted = 20 guitars x $18 per guitar = $360

Electric Guitar –

Traditional cost per unit          $122

ABC cost per unit                   $118

Product overcosted                 $4

Hence, electric guitar is overcosted by $4 per unit.

Total overcosted = 100 guitars x $4 per guitar = $400