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Burson Auto Parts manufactures two products X2 and X6 at its Victorian plant. The company currently uses a traditional normal costing system to cost its
Burson Auto Parts manufactures two products X2 and X6 at its Victorian plant. The company currently uses a traditional normal costing system to cost its products. Manufacturing overhead is allocated using a plant-wide rate based on machine hours. The new management accountant has suggested the company determine cost more accurately by using an activity-based costing (ABC) system. The accountant has estimated the following data for its two products for next year: Total 150,000 X2 50,000 $120/unit $10/hr 2hrs/unit X6 100,000 $140/unit $15/hr 3hrs/units Item Units produced and sold Direct Material cost Direct labour cost per hour Direct labour hours/unit Activities: Machine hours Number of times handled Number of parts Number of product setups 100,000 40,000 12,000 8,000 200,000 20,000 8,000 6,000 300,000 60,000 20,000 14,000 The accountant has budgeted indirect manufacturing costs, at the level of activity (refer to the table above) required for the next year's forecast sales, as follows: Cost Pool Machining Handling Number of parts Setups Total overhead Activity Costs $ 4,200,000 $ 1,800,000 $ 2,300,000 $ 2,800,000 $11,100,000 Required: i. Using the company's current traditional normal costing system, calculate the manufacturing cost of one unit of each product, X2 and X6. ii. Calculate the manufacturing cost of one unit of each product, X2 and X6, if the company uses activity-based costing using the four activity cost pools identified above and the appropriate driver. iii. a. Briefly explain why the unit costs calculated in (i) and (ii) above differ and b. Explain the impact of continuing to use the traditional plantwide rate may have on management devision and company performance in the competitive market
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