Case Study 2

Elite Home Appliances, LLC is producing different range of home appliances such as microwave oven, washing machines, dish washer, refrigerator, etc.

Assume you are senior accountant of Elite Home Appliances LLC and comparing between both the methods of costing absorption and ABC system on the basis of following information:

Production detail: -

In the month of June |Company expected to produce 100 units of microwave oven; 50 units of dish washer; 200 units of washing machines and 150 units of refrigerator.

Overheads, Activity and Cost Driver Details: -

(i) The overhead costs on production of components incurred RO 5,500. Machines run 2,000 hours (400 hours for Microwave ovens; 200 hours for dish washers; 600 hours for washing machines; 800 hours for refrigerators).

(ii) The overhead costs incurred on set-up RO 1,800. Number of set-up used 70 times (6 times for microwave ovens; 10 times for dish washers; 34 times for washing machines; 20 times for refrigerator) for all units produced.

(iii) The overhead costs on assembly of components incurred RO 4,500. Labor on assembly of components worked for 1,500 hours (325 hours for Microwave ovens; 325 hours for dish washers; 450 hours for washing machines; 350 hours for refrigerators).

(iv) The overhead costs incurred on packaging RO 2,400. Total 500 units of all types of home appliances packed.

(v) The overhead costs incurred on shipping RO 1,200. Total 500 units of all types of home appliances shipped.

Note: - Labor hours given for assembly of component will be the basis of apportionment and other calculation.

Prime Cost Details: -

(i) RO 15.00 per unit on component materials and RO 9.00 per unit on direct labour paid for microwave oven.

(ii) RO 17.50 per unit on component materials and RO 12.0 per unit on direct labour paid for dish washer.

(iii) RO 35.00 per unit on component materials and RO 25.000 per unit on direct labour paid for washing machines.

(iv) RO 45.00 per unit on component materials and RO 30.0 per unit on direct labour paid for refrigerator.

Requirements: -

1. Calculate total cost and cost per unit of each home appliances by applying absorption costing. [5 Marks]

2. Calculate the total cost and cost per unit of each home appliance by applying ABC system.

[5 Marks]

3. Calculate the selling price by adding 25% mark up on cost for each product. Also, Analyze over costing and under costing for each home appliance. [2.5 + 2.5 Marks]