Question

You are cost manager at Pristine Ltd which is the region’s largest manufacturer of commercial and residential elegant cabinets and wood works. Due to the competitive market and technological advancements in almost every area of the business, the board of directors from the input of division’s head and other senior management, has decided to shift from traditional costing techniques to activity based costing in order to arrive at more accurate cost per unit especially for the cabinets which is the top and most running product of the business. Activity based cost management (ABCM) is one of many new financial and accounting tools aimed at providing more complete, better-aligned data on economic performance. Pristine Ltd is preparing two types of storage cabinets, deluxe and executive and applies manufacturing overheads to all units at the rate of $1.20 per machine hour. Production information follows.

Deluxe ($) Executive ($)

Direct material cost 52.50 90.00

Direct labor cost 30.00 30.00

Budgeted volume (units) 8000 15000

The management accountant has determined that the firm’s overhead can be identified with three activities which are manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities’ three respective cost drivers, follows.

Deluxe Executive Total

Setups 50 30 80

Machine hours 16000 22500 38500

Outgoing shipments 100 75 175

The firm’s total overhead of $4,620,000 is subdivided as follows:

Manufactuing setups $1,008,000

Machine processing $2,772,000

Outgoing shipments $840,000

Total Overheads $4,620,000

Required:

a) Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company’s current overhead costing procedures.

b) Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity based costing method.

c) Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the company’s current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line.

d) Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating $45 discount to stimulates sales. Is this discount advisable? Breifly discuss.

Answer 1

Answer (A)
Computation of Manufacturing Cost of Deluxe and Executive cabinet
Particular	Deluxe               ($)	Executive                          ($)
Direct Material cost	52.5	90
Direct Labour Cost	30	30
Prime cost	82.5	120
Add :Overhed cost	240	180
Total Manufacturing Cost per unit	322.5	300
Computation of Overhead cost per unit	Deluxe	Executive
Machine hrs	16000	22500
Manufacturing Overhead rate permachin hrs	$ 120	$ 120
total overhead                        (A)	$ 1920000	$ 2700000
unit                                              (B)	8000	15000
Overhead cost per unit( A/B)                        $	240	180
Total Manufacturing Overhead rate per machine hour=$4620000/38500=$120 .
Answer (B)
Computation manufacturing cost by using Activity Based Costing Method
Manufacturing Overhead	Cost($)            ( 1)	Cost Drivers	Budgeted volume (2)	Cost drive rate($) (1/2)
Manufacturing Setups	1008000	Setups	80	12600
Machine processing	2772000	Machine hrs	38500	72
Outgoing shipments	840000	Outgoing shipments	175	4800
Computation of Manufacturing Cost
Particular	Deluxe               ($)	Executive                          ($)
Direct Material cost	52.5	90
Direct Labour Cost	30	30
Prime cost      (A)	82.5	120
Add: Overhead cost
Manufacturing Setups	78.75	25.2
	($12600*50/8000)	($12600*30/15000)
Machine processing	144	108
	($72*16000/8000)	($72*22500/15000)
Outgoing shipments	60	24
	($4800*100/8000)	($4800*75/15000)
Total Overhead cost (B)	282.75	157.2
Total Manufacturing Cost per unit (A+B)	365.25	277.2
Answer D
if Current Selling Price of Deluxe is $390
Total manufacturirng cost if Deluxe is$ 365.25.
if marketing manager give discount $45
therefore $390-$45=$345, its not favour ,the selling price after Discount is lessthan the cost
so loss will be $345-$365=($20) Answer C Deluxe               ($) Executive                          ($) total cost asper traditional system 322.5 300 Total Cost asper ABC method 365.25 277.2 42.75 22.8 Undercost/overcost Undercost Overcost