Chapter 17: 1PSB (page 799)

Wade Company makes two distinct products, with the following information available for each.
Standard Deluxe
Direct materials . . . . . . . . . . . . . . . . . . $ 4 per unit $ 8 per unit
Direct labor hours …………………….. 4 DLH per unit 5 DLH per unit
Machine hours …………………………. 3 MH per unit 3 MH per unit
Batches ………………………………….. 175 batches 75 batches
Volume …………………………………... 40,000 units 10,000 units
Engineering modifications …………... 50 modifications 25 modifications
Number of customers ………………… 1,000 customers 1,000 customers
Market price …………………………….. $92 per unit $125 per unit
The company’s direct labor rate is $20 per direct labor hour (DLH). Additional information follows.
Costs Driver
Indirect manufacturing
Engineering support …………………….. $ 56,250 Engineering modifications
Electricity ………………………………….. 112,500 Machine hours
Setup costs ……………………………….. 41,250 Batches
Nonmanufacturing
Customer service ……………………….. 250,000 Number of customers
Required
1. Compute the manufacturing cost per unit using the plantwide overhead rate based on machine hours. What is the gross profit per unit?
2. How much gross profit is generated by each customer of the standard product using the plantwide overhead rate? How much gross profit is generated by each customer of the deluxe product using the plantwide overhead rate? What is the cost of providing customer service to each customer? What information is provided by this comparison?
3. Determine the manufacturing cost per unit of each product line using ABC. What is the gross profit per unit?
4. How much gross profit is generated by each customer of the standard product using ABC? How much gross profit is generated by each customer of the deluxe product using ABC? Is the gross profit per customer adequate?
5. Which method of product costing gives better information to managers of this company? Explain.

Short Answer

Expert verified

Answer

Cost per unit under plant-wide method,

For product A =$88.2

For product B = $112.2

Gross profit per unit under the plant-wide method,

For product A =$3.8

For product B =$12.8

Cost per unit under the ABC method,

For product A =$87.91

For product B =$113.36

Gross profit per unit under the ABC method,

For product A =$4.09

For product B = $11.64

Step by step solution

Meaning of Direct Costs

Direct costs are those that are identified with each unit produced. For example, Wood and cloth are used for manufacturing wooden chairs and t-shirts respectively.

Calculation of requirement 1

$S i n g l e P l a n t w i d e O v e r h e a d A l l o c a t i o n R a t e = \frac{T o t a l I n d i r e c t M a n u f a c h r i n g C o s t}{T o t a l m a c h i n e h o u r b y p r o d u c t A + T o t a l m a c h i n e h o u r b y p r o d u c t B} = \frac{$ 65, 250 + $ 112, 500 + $ 41, 250}{(3 \times 40, 000) + (3 \times 10, 000)} = \frac{$ 2, 10, 000}{150, 000} = $ 1.4$

$M a n u f a c t u r i n g c o s t p e r u n i t f o r s t a n d a r d p r o d u c t = \frac{Total Direct Material Cost + Total Direct Labour cost + Total Indirect cost}{Total Number of units} = \frac{(54 \times 40, 000) + (4 \times 40, 000 \times $ 20) + ($ 1.4 \times 40.000)}{40, 000} = \frac{$ 3, 528, 000}{40, 000} = $ 88.2$

$G r o s s P r o f i t f o r s t a n d a r d p r o d u c t = M a r k e t P r i c e P e r u n i t - M a n u f a c t u r i n g c o s t p e r u n i t = $ 92 - $ 88.2 = $ 3.8$

$G r o s s P r o f i t f o r d e l u x e p r o d u c t = M a r c k e t P r i c e P e r u n i t - M a n u f a c t u r i n g c o s t p e r u n i t = $ 125 - $ 112.2 = $ 12.8$

Calculation of requirement 2

$G r o s s P r o f i t b y e a c h c u s t o m e r f o r p r o d u c t A = \frac{G r o s s P r o f i t p e r p r o d u c t \times N u m b e r o f p r o d u c t}{N u m b e r o f c u s t o m e r} = \frac{$ 3.8 \times 40, 000}{1000} = \frac{$ 152, 000}{1000} = $ 152$

$G r o s s P r o f i t b y e a c h c u s t o m e r f o r d e l u x e p r o d u c t = \frac{G r o s s P r o f i t p e r p r o d u c t \times N u m b e r o f p r o d u c t}{N u m b e r o f c u s t o m e r} = \frac{$ 12.8 \times 10, 000}{1000} = \frac{$ 128, 000}{1000} = $ 128$

$C u s t o m e r S e r v i c e C o s t p e r c u s t o m e r = \frac{T o t a l C u s t o m e r S e r v i c e C o s t}{T o t a l N u m b e r o f C u s t o m e r} = \frac{$ 250, 000}{1000 + 1000} = \frac{$ 250, 000}{2000} = $ 125$

The comparison of gross profit per customer provides that, on average, each customer generates$152of gross profit for standard product and$128of gross profit for the deluxe product.

Since the customer service cost per customer is the same for both products, the standard product returns a net gain of $27 per product, and the deluxe product returns a net gain of $3 per product

Calculation of requirement 3

Computation of manufacturing cost using ABC for standard product

$D i r e c t L a b o u r c o s t p e r u n i t = \frac{N o . o f d i r e c t l a b o u r h o u r \times R a t e}{N o . o f p r o d u c t s} = \frac{(4 \times 40, 000) \times $ 20}{40, 000} = $ 80$ $E n g i n e e r i n g S u p p o r t c o s t p e r u n i t = \frac{T o t a l E n g i n e e r i n g \cos t \times M o d i f i c a t i o n s b y s \tan d a r d p r o d u c t}{T o t a l m o d i f i c a t i o n s \times T o t a l N u m b e r o f p r o d u c t s} = \frac{$ 65, 250 \times $ 50}{(50 + 25) \times 40, 000} = \frac{$ 2, 812, 500}{75 \times 40, 000} = $ 0.9375$

role="math" localid="1654666897995" $E l e c t r i c i t y \cos t p e r u n i t = \frac{t o t a l E l e c t r i c i t y \cos t \times M a c h i n e h o u r b y s \tan d a r d p r o d u c t}{T o t a l M a c h i n e h o u r \times T o t a l N u m b e r o f p r o d u c t s} = \frac{$ 112, 500 \times (3 \times 40, 000)}{{(3 \times 40, 000) + (3 \times 10, 000)} \times 40, 000} = \frac{$ 112, 500 \times 120, 00}{(120, 000 + 30, 000) \times 40, 000} = $ 80$

$S e t u p c o s t p e r u n i t = = \frac{T o t a l S e t u p \cos t \times N o . o f b a t c h e s b y s t a n d a r d p r o d u c t}{T o t a l n o . o f b a t c h e s \times T o t a l N u m b e r o f p r o d u c t s} = \frac{$ 41, 250 \times 40, 000}{(175 + 75) \times 40, 000} = \frac{$ 41, 250 \times 175}{250 \times 40, 000} = $ 0.722$

role="math" localid="1654667364199" $T o t a l M a n u f a c t u r i n g c o s t p e r u n i t f o r s t a n d a r d p r o d u c t = D i r e c t M a t e r i a l C o s t + D i r e c t l a b o u r c o s t + I n d i r e c t M a n u f a c t u r i n g c o s t = $ 4 + $ 80 + (0.9375 + $ 2.25 + $ 0.722) = $ 87.905 o r $ 87.91$

Computation of manufacturing cost using ABC for deluxe product

Calculation of requirement 4

$G r o s s P r o f i t b y e a c h c u s t o m e r f o r s t a n d a r d p r o f i t = \frac{Gross profit per product \times Number of product}{Number of customer} = \frac{$ 4.09 \times 40, 000}{1000} = \frac{$ 163, 600}{1000} = $ 163.6$

$G r o s s P r o f i t b y e a c h c u s t o m e r f o r p r o f i t B = \frac{Gross profit per product \times Number of product}{Number of customer} = \frac{$ 11.64 \times 10, 000}{1000} = \frac{$ 116, 400}{1000} = $ 116.4$

Gross profit per customer is adequate as per the number of products produced and the number of customers to whom sold for each product.

Explanation of requirement 5

ABC system gives a better picture to the managers regarding the total cost per unit. Under the ABC system, the indirect cost is allocated per each product's activity level. Thus there is no chance of having overvalued or undervalued overhead allocation. The overhead allocated to each product matches the activity level.

So based on this, the ABC system provides more accurate information than the traditional method.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Budgeted Activity of Cost Driver
Activity Cost Pools	Budgeted Cost	Product A	Product B	Product C
Activity 1	\(140,000	20,000	9,000	6,000
Activity 2	\)90,000	8,000	15,000	7,000
Activity 3	$82,000	1,625	1,000	2,500

Short Answer

Step by step solution

Meaning of Direct Costs

Calculation of requirement 1

Calculation of requirement 2

Calculation of requirement 3

Calculation of requirement 4

Explanation of requirement 5

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Business Development

Organizational Behavior

Strategic Direction

Intermediate Accounting

Introduction to Business

Business Case Studies

Study anywhere. Anytime. Across all devices.

Company

Product

Help