Question

Calculate the product cost and profitability of each of Wayco Leisure’s three types of product using each of the following methods to attribute overheads: (I) The existing methods based upon labour hours.

information. Direct labour $20 per hour

	Annual Output (Units)	Annual Direct labour hours	Selling price ($ per unit)	Raw material cost ($ per unit)
Getaway	2000	50,000	4,000	400
Relax	1600	55,000	6,000	600
Unwind	400	20,000	8,000	900

The three cost drivers that generate overheads are:

Deliveries to retailers: the number of deliveries of caravans to retail showrooms

Set-ups: the number of times the assembly line process is re-set to accommodate a

production run of a different type of caravan.

Purchase orders: the number of purchase orders.

The annual cost driver volumes relating to each activity and for each type of caravan are as follows:

	Number of deliveries to retailers	Number of set- ups	Number of purchase orders
Getaway	100	35	400
Relax	80	40	300
Unwind	70	25	100

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The annual overhead costs relating to these activities are as follows:

Particulars

Deliveries to retailers

Amount ($)

2,400,000

Set-up costs

6,000,000

Purchase orders

3,600,000

Answer 1

Calculate the product cost and profitability under existing method
Predetermined overhead rate = Total overhead cost / Total Direct labour hours
Predetermined overhead rate = $12,000,000 / 125000 hours = $96 per direct labour hour
Product cost of each product
Products	Getaway	Relax	Unwind
Raw material	$800,000.00	$960,000.00	$360,000.00
Direct Labour	$1,000,000.00	$1,100,000.00	$400,000.00
Overheads	$4,800,000.00	$5,280,000.00	$1,920,000.00
Total Cost	$6,600,000.00	$7,340,000.00	$2,680,000.00
Profitability of each product
Products	Getaway	Relax	Unwind
Sales	$8,000,000.00	$9,600,000.00	$3,200,000.00
Less : Product Cost	$6,600,000.00	$7,340,000.00	$2,680,000.00
Profit (loss)	$1,400,000.00	$2,260,000.00	$520,000.00
Calculate the product cost and profitability under activity based costing method
Activity driver rate
Delivery cost per delivery = Total delivery cost / Total Number of deliveries to retailers = $2400000/250 deliveries = $9600 per delivery
Set up cost per set up = Total setup cost / Total number of setups = $6000000/100 setups = $60,000 per setup
Purchase order cost per order = Total purchase order cost / Total number of purchase orders = $3600000/800 orders = $4500 per purchase order
Product cost of each product
Products	Getaway	Relax	Unwind
Raw material	$800,000.00	$960,000.00	$360,000.00
Direct Labour	$1,000,000.00	$1,100,000.00	$400,000.00
Overheads
- Delivery cost	$960,000.00	$768,000.00	$672,000.00
- Setup cost	$2,100,000.00	$2,400,000.00	$1,500,000.00
- Purchase order cost	$1,800,000.00	$1,350,000.00	$450,000.00
Total Cost	$6,660,000.00	$6,578,000.00	$3,382,000.00
Profitability of each product
Products	Getaway	Relax	Unwind
Sales	$8,000,000.00	$9,600,000.00	$3,200,000.00
Less : Product Cost	$6,660,000.00	$6,578,000.00	$3,382,000.00
Profit (loss)	$1,340,000.00	$3,022,000.00	-$182,000.00