Question

company produces camping equipment: tents, sleeping bags, and tarps. They are implementing a new accounting software and want to take the opportunity to implement activity based costing for their products. For the upcoming year, they expect to produce and sell 300,000 sleeping bags, 200,000 tents and 150,000 tarps.

Because the employees in HR, Engineering and Facilities are salaried, and because the Building Rent and Machine depreciation are in the Facilities department, the Human Resources, Facilities Maintenance, and Engineering and Quality Departments are considered to be all Fixed Costs. The production departments include costs for hourly workers, spare parts, and utilities, therefore, the Fabrication and Assembly Production Departments are considered to be all Variable Costs.

The departments, costs and other related information are as follows:

	Department	Annual Budget Direct exp		Cost Driver		Headcount	Square feet
	Human Resources Department	$                                 300,000.00		Headcount
	Facilities Maintenance Department	$                              1,500,000.00		Square Feet		10
	Engineering and Quality Department	$                                 400,000.00		Square Feet		5
	Fabrication Produciton Departement	$                              1,800,000.00		Machine hours		20	40,000
	Assembly Produciton Department	$                              1,200,000.00		Man Labor hours		15	60,000
The hour in production are budgeted as follows:
	Product Line	Fabrication Time		Assembly time
	Sleeping Bags	4,160		Machine hours		49,920	Man labor hours
	Tents	4,160		Machine hours		37,440	Man labor hours
	Tarps	2,080		Machine hours		6,240	Man labor hours
The Raw Material costs and usage is as follows:
	Raw Materials	Cost		Unit
	Nylon	$                                             2.50		Square yard
	Carbon Fiber	$                                             8.00		per kg
	Polyfill	$                                             1.00		per kg
	Raw Material usage	Nylon		Carbon Fiber		Polyfill
	Sleeping Bags	6.0	sq yd	0	kg	1.5	kg
	Tents	10.0	sq yd	2.5	kg	0	kg
	Tarps	8.0	sq yd	0.5	kg	0	kg

Current Sales Prices are $60 each for Sleeping Bags, $120 each for Tents, and $35 each for Tarps.

Your company wants to determine standard costs as well as understand the drivers for their costs. You have been requested to complete the following calculations. Each calculation should show the fixed cost, variable cost and total cost.

Using the step-down method, allocate costs from the support departments to the production departments.

Calculate the Hourly Operating Rate for each production department, and calculate the annual production costs for each product line.

Calculate the Standard Cost per unit for each Product type.

Calculate the Contribution Margin per unit, Standard Gross Profit per unit, Gross Margin Percentage and Total annual gross profit for each Product type.

Answer 1

Allocation of cost from the service department to the production department
using step down method
	Service Department			Production Department
	HR Department	Facilities Maintenance Department	Engineering and Quality Department	Fabrication Production department	Assembly Production Department	Total
Annual Budget direct expenses	$300,000	$1,500,000	$400,000	$1,800,000	$1,200,000	$5,200,000
Allocation:
HR Department	($300,000)	$60,000	$30,000	$120,000	$90,000
Facilities Maintenance Department		($1,560,000)		$624,000	$936,000
Engineering and Quality Department			($430,000)	$172,000	$258,000
Total	$0	$0	$0	$2,716,000	$2,484,000	$5,200,000
Hourly Operating rate		Allocated expenses
Annual Budgeted direct expenses	$1,800,000	$916,000
Total machine hours	10400	10400
Hourly Operating rate	$173.08	$88.08
Annual Budgeted direct expenses	$1,200,000	$1,284,000
Total man labor hours	93600	93600
Hourly Operating rate	$12.82	$13.72
Annual Production cost for each product line
	Sleeping Bags	Tents	Tarps	Total
Machine hours	4160	4160	2080	10400
Hourly Operating rate	$173	$173	$173
Fabrication Production Cost	$720,000	$720,000	$360,000	1800000
Man labor hours	49920	37440	6240	93600
Hourly Operating rate	$12.82	$12.82	$12.82
Assembly Production cost	$640,000	$480,000	$80,000	1200000
Total Variable Production cost	$1,360,000	$1,200,000	$440,000	3000000
Fabrication Production Fixed Cost	$366,400	$366,400	$183,200	916000
Assembly Production Fixed cost	$684,800	$513,600	$85,600	1284000
Total Fixed Production cost	$1,051,200	$880,000	$268,800	2200000
Standard Cost per unit for each product type
	Sleeping Bags	Tents	Tarps	Total
Raw Material per unit	$16.50	$45.00	$24.00	$85.50
Production cost per unit	$4.53	$6.00	$2.93	$13.47
Fixed Cost per unit	$3.50	$2.57	$0.57	$6.64
Standard Cost per unit	$24.54	$53.57	$27.50	$105.61
Contribution Margin per unit
	Sleeping Bags	Tents	Tarps
Sales Price	$60	$120	$35
Less: Variable Cost	$21.03	$51.00	$26.93
Contribution Margin per unit	$38.97	$69.00	$8.07
Standard Gross Profit per unit
	Sleeping Bags	Tents	Tarps
Sales Price per unit	$60	$120	$35
Less: Variable Cost per unit	$21.03	$51.00	$26.93
Fixed cost per unit	$3.50	$2.57	$0.57
Gross Profit Per unit	$35.46	$66.43	$7.50
Gross Margin Percentage	59%	55%	21%
Annual Gross profit	$10,638,800	$13,286,400	$1,124,400