Question

In: Accounting

Background: Elon Musk, the man who is responsible for revolutionizing the automotive space is confused. Why...

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?

Solutions

Expert Solution

(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

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