In: Accounting
Background: Elon Musk, the man who is responsible for revolutionizing the automotive space is confused. Why you ask? | ||||
He met with Ms. Static who explained to him that under the current allocation system, engineering costs amount to $46,880 per Model S and $15,630 per Model X. Elon responds: | ||||
"How - Look at the Model X - its freaking awesome and is insanely over engineered. How can it cost leass than our base model?" he decides to hire you as a consultant to drive transperency into the costs … | ||||
Problem: Develop ABC to clear the mess up | ||||
Cost Pool | Activity Costs | Cost Driver | Driver | |
Machine Setup | $ 360,000 | Setup Hours | 4,000 | |
Materials Handling | $ 100,000 | Material (lbs) | 20,000 | |
Utility | $ 40,000 | Kw/hr | 40,000 | |
Information by Product | Model S | Model X | ||
Units | 4,000 | 20,000 | ||
Direct Materials | $ 42,000 | $ 54,000 | ||
Direct Labor | $ 24,000 | $ 40,000 | ||
Setup Hours | 200 | 240 | ||
Materials | 1,000 | 3,000 | ||
Kw/Hr | 2,000 | 4,000 | ||
ii | What / How do you suspect Ms. Static arrived at her numbers? | |||
(A) | (B) | (A)/(B) | ||
Activity cost driver | Activity cost | Driver | Overhead Rate | |
Machine Setup | Setup Hours | $ 3,60,000.00 | 4000 | $ 90.00 |
Material Handling | Material (Lbs) | $ 1,00,000.00 | 20000 | $ 5.00 |
Utility | KW/H | $ 40,000.00 | 40000 | $ 1.00 |
Model S | Model X | |||
Units=(A) | 4000 | 20000 | ||
Direct Material | $ 42,000.00 | $ 54,000.00 | ||
Direct Labor | $ 24,000.00 | $ 40,000.00 | ||
Machine Setup(200*$90) for Model S,(240*$90) for Model X | $ 18,000.00 | $ 21,600.00 | ||
Material Handling(1000*$5) for Model S,(3000*$5) for Model X | $ 5,000.00 | $ 15,000.00 | ||
Utiltiy(2000*$1) for Model S,(4000 *$1) for Model X | $ 2,000.00 | $ 4,000.00 | ||
Total Cost=(B) | $ 91,000.00 | $ 1,34,600.00 | ||
Cost per unit=(B)/(A) | $ 22.75 | $ 6.73 |