Question

Question:Treat Dog Collars uses activity-based costing. Treat’s system has the following features:

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Activity Allocation BasePredetermined

Overhead Allocation Rate

Purchasing Number of purchase orders \( 60.00 per purchase order

Assembling Number of parts 0.36 per part

Packaging Number of finished collars 0.19 per collar

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Each collar has three parts, direct materials cost is \)5.00 per collar, and direct laborcost is \(4.00 per collar. Suppose Animal Hut has asked for a bid on 30,000 dog collars.Treat will issue a total of 175 purchase orders if Animal Hut accepts Treat’s bid.

Requirements

1. Compute the total estimated cost Treat will incur to purchase the needed materialsand then assemble and package 30,000 dog collars. Also compute the cost percollar.

2. For bidding, Treat adds a 40% markup to total cost. What total price will the companybid for the entire Animal Hut order?

3. Suppose that instead of an ABC system, Treat has a traditional product costingsystem that allocates indirect costs at the rate of \)9.50 per direct labor hour. Thedog collar order will require 9,000 direct labor hours. What total price will Treat bidusing this system’s total cost?

4. Use your answers to Requirements 2 and 3 to explain how ABC can help Treatmake a better decision about the bid price it will offer Animal Hut.

Short answer

Total estimated cost under ABC:$308,160

Total estimated cost under traditional method:$355,500

Bidding price under ABC:$431,424

Bidding price under traditional method:$497,700

Step-by-step solution

Step-by-Step-SolutionStep1: 1) Computation of total estimated cost and per-unit cost

No. of dog collars: 30,000

No. of purchase orders: 1 (one purchase order has 30,000 collars)

$$\begin{gathered} Purchasingcost=Predeterminedoveredallocationrate\times No.ofpurhcaaeorders \\ =\$60\times 1 \\ =\$60 \\ Assemblingcost=Predeterminedoveredallocationrate\times No.ofparts \\ =\$0.36\times \left(3\times 30,000\right) \\ =\$0.36\times 90,000 \\ =\$32,400 \\ Packagingcost=Predeterminedoveredallocationrate\times No.offinishedcollars \\ =\$0.19\times 30,000 \\ =\$5,700 \\ DirectMaterialcost=Perunitcost\times No.ofcollars \\ =\$5\times 30,000 \\ =\$150,000 \\ DirectLaborcost=Perunitcost\times No.ofcollars \\ =\$4\times 30,000 \\ =\$120,000 \\ Totalestimatedcost=Directmaterialcost+Directlaborcost+Totalmanufacturingcost \\ =\$150,000+\$120,000+\left(\$60+\$32,400+\$5,700\right) \\ =\$270,000+\$38,160 \\ =\$308,160 \end{gathered}$$uncaught exception: Invalid chunk

in file: /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php line 68
#0 /var/www/html/integration/lib/php/Boot.class.php(769): com_wiris_plugin_impl_HttpImpl_1(Object(com_wiris_plugin_impl_HttpImpl), NULL, 'http://www.wiri...', 'Invalid chunk') #1 /var/www/html/integration/lib/haxe/Http.class.php(532): _hx_lambda->execute('Invalid chunk') #2 /var/www/html/integration/lib/php/Boot.class.php(769): haxe_Http_5(true, Object(com_wiris_plugin_impl_HttpImpl), Object(com_wiris_plugin_impl_HttpImpl), Array, Object(haxe_io_BytesOutput), true, 'Invalid chunk') #3 /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php(30): _hx_lambda->execute('Invalid chunk') #4 /var/www/html/integration/lib/haxe/Http.class.php(444): com_wiris_plugin_impl_HttpImpl->onError('Invalid chunk') #5 /var/www/html/integration/lib/haxe/Http.class.php(458): haxe_Http->customRequest(true, Object(haxe_io_BytesOutput), Object(sys_net_Socket), NULL) #6 /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php(43): haxe_Http->request(true) #7 /var/www/html/integration/lib/com/wiris/plugin/impl/RenderImpl.class.php(268): com_wiris_plugin_impl_HttpImpl->request(true) #8 /var/www/html/integration/lib/com/wiris/plugin/impl/RenderImpl.class.php(307): com_wiris_plugin_impl_RenderImpl->showImage('9b45cdd2562d224...', NULL, Object(PhpParamsProvider)) #9 /var/www/html/integration/createimage.php(17): com_wiris_plugin_impl_RenderImpl->createImage('uncaught exception: Invalid chunk

in file: /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php line 68
#0 /var/www/html/integration/lib/php/Boot.class.php(769): com_wiris_plugin_impl_HttpImpl_1(Object(com_wiris_plugin_impl_HttpImpl), NULL, 'http://www.wiri...', 'Invalid chunk') #1 /var/www/html/integration/lib/haxe/Http.class.php(532): _hx_lambda->execute('Invalid chunk') #2 /var/www/html/integration/lib/php/Boot.class.php(769): haxe_Http_5(true, Object(com_wiris_plugin_impl_HttpImpl), Object(com_wiris_plugin_impl_HttpImpl), Array, Object(haxe_io_BytesOutput), true, 'Invalid chunk') #3 /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php(30): _hx_lambda->execute('Invalid chunk') #4 /var/www/html/integration/lib/haxe/Http.class.php(444): com_wiris_plugin_impl_HttpImpl->onError('Invalid chunk') #5 /var/www/html/integration/lib/haxe/Http.class.php(458): haxe_Http->customRequest(true, Object(haxe_io_BytesOutput), Object(sys_net_Socket), NULL) #6 /var/www/html/integration/lib/com/wiris/plugin/impl/HttpImpl.class.php(43): haxe_Http->request(true) #7 /var/www/html/integration/lib/com/wiris/plugin/impl/RenderImpl.class.php(268): com_wiris_plugin_impl_HttpImpl->request(true) #8 /var/www/html/integration/lib/com/wiris/plugin/impl/RenderImpl.class.php(307): com_wiris_plugin_impl_RenderImpl->showImage('05578823bf4acf7...', NULL, Object(PhpParamsProvider)) #9 /var/www/html/integration/createimage.php(17): com_wiris_plugin_impl_RenderImpl->createImage('$$\begin{gathered} Assemblingcost=Predeterminedoveredallocationrate\times No.ofparts \\ =\$0.36\times \left(3\times 30,000\right) \\ =\$0.36\times 90,000 \\ =\$32,400 \end{gathered}$$

$$\begin{gathered} Packagingcost=Predeterminedoveredallocationrate\times No.offinishedcollars \\ =\$0.19\times 30,000 \\ =\$5,700 \end{gathered}$$

$$\begin{gathered} DirectMaterialcost=Perunitcost\times No.ofcollars \\ =\$5\times 30,000 \\ =\$150,000 \end{gathered}$$

$$\begin{gathered} DirectLaborcost=Perunitcost\times No.ofcollars \\ =\$4\times 30,000 \\ =\$120,000 \end{gathered}$$

$$\begin{gathered} Totalestimatedcost=Directmaterialcost+Directlaborcost+Totalmanufacturingcost \\ =\$150,000+\$120,000+\left(\$60+\$32,400+\$5,700\right) \\ =\$270,000+\$38,160 \\ =\$308,160 \end{gathered}$$

$$\begin{gathered} Perunitcost=\frac{TotalCost}{No.ofcollars} \\ =\frac{\$308,160}{30,000} \\ =\$10.27 \end{gathered}$$

2) Price for bidding

$$\begin{gathered} BiddingPrice=Totalcost\times 100+Markuppercent \\ =\$308,160\times \left(\frac{100+40}{100}\right) \\ =\$308,160\times 1.4 \\ =\$431,424 \end{gathered}$$

Bid price using traditional system

$$\begin{gathered} TotalIndirectcost=No.ofdirectlaborhourperorder\times Perhourdirectlabourrate \\ =9,000\times \$9.50 \\ =\$85,500 \end{gathered}$$

$$\begin{gathered} Totalestimatedcost=Directmaterialcost+Directlaborcost+Totalmanufacturingcost \\ =\$150,000+\$120,000+\$85,500 \\ =\$355,500 \end{gathered}$$

$$\begin{gathered} BiddingPrice=Directmaterialcost+Directlaborcost+Totalmanufacturingcost \\ =\$150,000+\$120,000+\$85,500 \\ =\$355,500 \end{gathered}$$

$$\begin{gathered} BiddingPrice=Totalcost\times 100+Markuppercent \\ =\$355,500\times \left(\frac{100+40}{100}\right) \\ =\$355,500\times 1.4 \\ =\$497,700 \end{gathered}$$

Comparison of bidding price under two methods

Under activity-based costing, the indirect cost is allocated based on the proportion of different activities. This makes the cost allocation fair and no cost is over-allocated to any product or job. On the contrary, in the traditional method, some cost is over-allocated due to the uniform base of allocation.

In the given case, direct material cost and direct labor cost are the same in both cases. But the indirect cost is over-allocated in the traditional method. This has made the bidding price costly and the offer may be rejected. But the activity-based costing has allocated the cost very appropriately and the bidding price is lower in this case.

So, this method would provide a better offer to Animal Hut