Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC problem Tough Thermos, Inc. manufactures two plastic thermos containers. The large container is called the Ice House. The smaller container is called the Cool

ABC problem

Tough Thermos, Inc. manufactures two plastic thermos containers. The large container is called the Ice House. The smaller container is called the Cool Chest. The Ice House sells for $35 and the Cool Chest sells for $24. The production costs computed per unit under traditional costing for each model in 2008 were as follows.

Traditional Costing

Ice House

Cool Chest

Direct materials

$ 9.50

$ 6.00

Direct labor ($10 per hour)

8.00

5.00

Manufacturing overhead ($17.08 per DLH)

13.66

8.54

Total per unit cost

$31.16

$19.54

In 2008, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labor hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labor hours (50,000) for the 2 models.

Under traditional costing, the gross profit on the two containers was: Ice House $3.84 or ($35 $31.16), and Cool Chest $4.46 or ($24 $19.54). Because of this difference, management is considering phasing out the Ice House model and increasing production of the Cool Chest Model.

Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activity-based costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2008.

Activities

Cost Drivers

Estimated Overhead

Expected Use of Cost Drivers

Activity-Based Overhead Rate

Purchasing

Number of orders

$179,000

4,475 purchase orders

$40 per order

Machine setups

Number of setups

$195,000

780 setups

$250 per setup

Extruding

Machine hours

$ 320,000

80,000 machine hours

$4 per machine hour

Quality control

Tests and inspections

$ 160,000

8,000 tests

$20 per test

The cost drivers used for each product were:

Cost Drivers

Ice House

Cool Chest

Total

Purchase orders

2,500

1,975

4,475

Machine setups

480

300

780

Machine hours

60,000

20,000

80,000

Tests and inspections

5,000

3,000

8,000

1. Assign the total 2008 manufacturing overhead to the two products using activity based costing. Show calculations. 2. What was the total cost per unit and the gross profit per unit of each moel using ABC costing? Show calculations. 3. Are managment's future plans for the two models sound?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions

Question

denigration of emotional outbursts; being reserved;

Answered: 1 week ago