Question

Coastal Cycles makes three models of electric bicycles: E20, E35, and E60. The models differ by the size of the battery and the quality of the components.

The bicycles are produced in two departments.

The Assembly Department purchases components from vendors and assembles them into bicycles. The models E20 and E35 are complete and ready for sale after completing the assembly process.

The model E60 undergoes further process in Customization Department, which is actually just a small area in the same building as the Assembly Department.

Conversion costs in both the Assembly Department and Customization Department are based on the number of units produced. There are never any work-in-process inventories.

Data for production in November are shown in the following table.

		Total		E20			E35			E60
Units produced		7,000			3,000			2,500			1,500
Materials cost	$	4,900,000		$	1,500,000		$	1,900,000		$	1,500,000
Conversion costs
Assembly		4,410,000			-			-			-
Customization		525,000			-			-			-
Total conversion costs	$	4,935,000			-			-			-

The marketing manager cannot believe that the Controller wants to treat all bicycles the same. He says that in order to understand where to target marketing resources, he needs to understand the profitability (and therefore the costs) of the individual models. He suggests treating the individual models as "jobs" using job costing to calculate the costs of the individual models. He also suggested, based on what he remembered from his cost accounting course, that the conversion costs should be applied to the jobs based on direct material costs.

Required:

a. Suppose the marketing manager's suggestion is followed. What will be the unit cost of a bike produced in November?

	Unit Cost
E20	?
E35	?
E60

Answer 1

The model E20 And E35 are complete after assembly process thus they does not go for customization .The E60 is the only model thats go for customization and thus all of the customization cost is solely incurred on model E60.

Allocation of conversion cost = Conversion cost of department * Material cost of model /total material cost

	E20	E35	E60
Material cost	1500000	1900000	1500000
conversion cost
Assembly	4410000*1500000/4900000= 1350000	4410000*1900000/4900000= 1710000	4410000*1500000/4900000=1350000
Customaization			525000
Total cost [i]	2850000	3610000	3375000
Number of units [ii]	3000	2500	1500
Unit cost [i/ii]	950	1444	2250