Chapter C, Problem 2E

To determine

Introduction:

Activity-based costing: The accounting method where the overhead costs are identified based on the activities and then assigns the cost to each objects refers to activity based costing. This costing traces the activities or process of production and group together the individual activities with the similar job that are termed as cost pool related to cost driver of single activity.

Requiremnet-1a:

To Compute:

The overhead cost per unit for each product line using the activity based costing.

Answer to Problem 2E

Solution: The overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.

Explanation of Solution

Activity	A. Overhead Costs	B. Expected Activity		C. Activity Rate (A/B)		Model 145		Model 212
						D1. Activity driver incurred	E1. Overhead assigned=C*D1	D2. Activity driver incurred	E2. Overhead assigned=C*D2
Components	($)			($)			($)		($)
Changeover	500,000	800	Number of batches	625.00	per batch	400	250,000	400	250,000
Machining	279,000	6,000	Machine hours	46.50	per machine hours	1,800	83,700	4,200	195,300
Setups	225,000	120	Setups	1,875.00	per setup	60	112,500	60	112,500
Finishing
Welding	180,300	3,000	Welding hours	60.10	per welding hour	800	48,080	2,200	132,220
Inspecting	210,000	700	Number of inspections	300.00	per inspection	400	120,000	300	90,000
Rework	75,000	300	Rework orders	250.00	per rework order	160	40,000	140	35,000
Support
Purchasing	135,000	450	Purchase orders	300.00	per purchase order	300	90,000	150	45,000
Providing Space	32,000	5,000	Number of units produced	6.40	per unit	1,500	9,600	3,500	22,400
Providing Utilities	65,000	5,000	Number of units produced	13.00	per unit	1,500	19,500	3,500	45,500
Total overhead cost							773,380		927,920
Total units produced							1,500		3,500
Overhead cost per unit							515.59		265.12

The formula for calculating overhead cost per unit using activity based costing is:

$Overheadcostperunit=TotalOverheadCost/Numberofunitsproduced$

Thus using the above formula, the overhead cost per unit for both the models are calculated as below:

Model 145:

Total overhead cost [As calculated in the table] is: $773,380

Number of units produced: $1,500

Overhead cost per unit for Model 145: $\$773,380/1,500=\$515.59$

Model 212:

Total overhead cost [As calculated in the table] is: $927,920

Number of units produced: $3,500

Overhead cost per unit for Model 212: $\$927,920/3,500=\$265.12$

Conclusion

Hence the overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.

To determine

Requirement-2:

To determine:

The total cost per unit for each product line if the direct labour and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.

Answer to Problem 2E

Solution:

Model 145: $\$250+\$515.59=\$765.59$

Model 212: $\$180+\$265.12=\$445.12$

Explanation of Solution

The formula for computing total cost per unit is:

$DirectMaterial+DirectLabor+Overhead$

Hence using the above formula the total cost per unit for each model is computed as below:

Model 145:

Given,

Direct Material and labour costs per unit: $250

Overhead Cost for Model 145 (As calculated in Requirement-1): $515.59

Total costs per unit for Model 145: $\$250+\$515.59=\$765.59$

Model 212:

Given,

Direct Material and labour costs per unit: $180

Overhead rate for Model 212 (As calculated in Requirement-1): $265.12

Total costs per unit for Model 212: $\$180+\$265.12=\$445.12$

Conclusion

Hence the total cost per unit for Model 145 is $765.59 and Model 212 is $445.12.

To determine

Requirement-3a:

To determine:

The profit or loss per unit for each model when the market price is $800 for Model 145 and $470 for Model 212

Answer to Problem 2E

Solution:

Model 145:

Profit/Loss per unit: $800-$765.59

Profit= $34.41

Model 212:

Profit/Loss per unit: $470-$445.12

Profit=$24.88

Explanation of Solution

The formula for determining profit or loss per unit is:

$ProfitorLossperunit=Marketpriceperunit-Costperunit$

Hence the profit or loss for each model is determined using the formula as below:

Model 145:

Market Price per unit: $800

Costs per unit: $765.59

Profit/Loss per unit: $800-$765.59

Profit=$34.41

Model 212:

Market Price per unit: $470

Costs per unit: $445.12

Profit/Loss per unit: $470-$445.12

Profit: $24.88

Conclusion

Hence the Model 145 contributes to the profit of $34.41 and Model 212 has the profit of $24.88.

To determine

Requirement-3b:

To discuss:

The results of profit for both the models when the market price is $800 for Model 145 and $470 for the Model 212

Answer to Problem 2E

Solution:

The profit contributed by Model 145 of $34.41 is greater than the profit of $24.88 contributed by Model 212 which means that Model 145 ensures the competitive success of the business compared to the Model 212. Therefore either the market price of the Model 212 should be increased or the total costs per unit of the model should be reduced if the Model 212 expects to earn a higher profit.

Explanation of Solution

Both Model 145 and Model 212 of air conditioners contribute to the profit of the Real Cool Company. However the Model 145 contributes to the higher profit of $34.41 when compared to Model 212 that contributes only to $24.88.

The production profit significantly matters to the company to continue the proposal in the long run. Hence in the given scenario, manufacturer should chose the manufacturing model that contributes to the higher profit of the company.

Conclusion

Hence the Model 145 of Real Cool manufacturers contribute to the higher profit making the production more profitable compared to the profit generated by the Model 212. Thus the Model 145 ensures for the competitive success of the business and its survival in the long run in the given scenario.