Question

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
iii	Knowing Tesla's business - are there additional things that you would look into in cost allocation? (Remember: Tesla has significant costs related to battery, R&D, software programming, Qaing, etc.)

Answer 1

	Activity Based Allocation per model
		Model S	Model X
	DM	$42,000	$54,000	Allocation Basis
	DL	$24,000	$40,000			Model S	Model X
	Machine Set Up	$36,000	$43,200	Machine Set Up	$360,000
	Material Handling	$5,000	$15,000	Total Set Up Hrs	4000	200	240
	Utilities	$2,000	$4,000	Allocation
	Total OH Cost Excluding DM and DL	$43,000	$62,200	$360000/2000*200		$36,000
				$360000/2000*240			$43,200
				Material Handling	$100,000
				Total materials lbs	20000	1000	3000
				Allocation
				$100000/20000*1000		$5,000
				$100000/20000*3000			$15,000
				Utility	$40,000
				Total Kw/Hr	40000	2000	4000
				Allocation
				$40000/40000*2000		$2,000
				$40000/40000*4000			$4,000
	The cornerstone of ABM is distinguishing between value-added costs and non-value-added costs. A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer. Valueadded costs are necessary (as long as the activity that drives such costs is performed efficiently). In contrast, companies try to minimize non-valueadded costs—costs that can be eliminated without affecting a product’s value to the customer. Activities such as handling and storing inventories, transporting partly finished products from one part of the plant to another, and changing the set-up of production line operations to produce a different model of the product are all non-value-added activities that can be reduced, if not eliminated, by careful redesign of the plant layout and the production process
	Sinc e Telsa is a automobile manufacturing space which manufactures and allocates
	costs to the different models in order to find out the profitability of each
	model Telsa is producing.
	So from the age old traditional model of allocating cost into Model S and Model X which
	shows a higher cost in terms of engineering for the machine set up,material handling
	and utilities than if we use the ABM for Model S which shows lesser cost .
	So the non value added activties like battery ,R & D should be reduced to make the cost
	comparable in the market for Tesla