Question

The Federation Company has analysed various activities in its value chain of business functions that extend from research and development through customer service. One of its products, a special diesel engine, has a manufacturing cost of $13,000 per unit. In addition, the following applicable costs have been identified with the engine: research and development $800, product design $1,200, marketing $5,000, distribution $900 and customer services $1,600.

Firstly, calculate the full product cost per unit and secondly, provide a general description of how the $13,000 manufacturing cost would be built up under activity-based costingd various activities in its value chain of business functions that extend from research and development through customer service. One of its products, a special diesel engine, has a manufacturing cost of $13,000 per unit. In addition, the following applicable costs have been identified with the engine: research and development $800, product design $1,200, marketing $5,000, distribution $900 and customer services $1,600. Firstly, calculate the full product cost per unit and secondly, provide a general description of how the $13,000 manufacturing cost would be built up under activity-based costing

Answer 1

Full product cost per unit does not include marketing , distribution and customer related costs as they are incurred after the product is actually produced.

Thus full product cost per unit = manufacturing cost + research and development + product design

full product cost per unit = 13000 + 800 + 2100 = $15900

In activity based costing, costs are allocated to departments on the basis of a particular "cost driver". A cost driver is an activity that determines the cost that will be incurred.

In engine manufacturing, the activites associated can be as follows:

Pretreatment of engine parts : (The pretreatment stage cleanses contaminants from the product which may have been collected)

Assembly of engine parts

Inspection and Testing of parts

and so on.