ABC, Inc., manufactures only two products: Gadget A and Gadget B. The firm uses a single, plant wide overhead rate based on direct-labor hours. Production and product-costing data are as follows:

Gadget A

Gadget B

Production quantity

1,000 units

5,000 units

Direct material

Rs.160

Rs.240

Direct labor (not including setup time)

Rs. 120 (4 hr. at Rs.30)

Rs. 180 (6 hr. at Rs.30)

Manufacturing overhead*

Rs. 384 (4 hr. at Rs.96)

Rs. 576 (6 hr. at Rs.96)

Total cost per unit

Rs. 664

Rs. 996

*Calculation of predetermined overhead rate:

Manufacturing overhead budget:

Machine-related costs Rs.1,800,000

Setup and inspectionRs. 720,000

EngineeringRs. 360,000

Plant-related costsRs. 384,000

Total Rs. 3,264,000

ABC, Inc., prices its products at 120 percent of cost, which yields target prices of Rs.796.80 for Gadget A and Rs.1,195.20 for Gadget B. Recently, however, ABC has been challenged in the market for Gadget B by a European competitor, Quantum Corporation. A new entrant in this market, Quantum has been selling Gadget B for Rs.880 each. ABC's president is puzzled by Quantum's ability to sell Gadget B at such a low cost. She has asked you (the controller) to look into the matter. You have decided that ABC's traditional, volume-based product-costing system may be causing cost distortion between the firm's two products. Gadget B are a high-volume, relatively simple product. Gadget A, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.

Required:

1.Let each of the overhead categories in the budget represent an activity cost pool. Categorize each in terms of the type of activity (e.g., unit-level activity).

2.The following cost drivers have been identified for the four activity cost pools.

Activity Cost Pool

Cost Driver

Budgeted Level of Cost Driver

Machine-related costs

Machine hours

18,000 hr.

Setup and inspection

Number of production runs

80 runs

Engineering

Engineering change orders

200 change orders

Plant-related costs

Square footage of space

3,840 sq. ft.

You have gathered the following additional information:

Each odd requires 8 machine hours, whereas each end requires 2 machine hours.

Gadget A are manufactured in production runs of 25 units each. Gadget B are manufactured in 125 unit batches.

Three-quarters of the engineering activity, as measured in terms of change orders, is related to Gadget A.

The plant has 3,840 square feet of space, 80 percent of which is used in the production of Gadget A.

For each activity cost pool, compute a pool rate.

3.Determine the unit cost, for each activity cost pool, for Gadget A and Gadget B.

4.Compute the new product cost per unit for Gadget A and Gadget B, using the ABC system.

5.Using the same pricing policy as in the past, compute prices for Gadget A and Gadget B. Use the product costs determined by the ABC system.