Case Study 2

Gadgets Electronics, LLC is producing four gadgets microphone, headphone, webcam and memory stick.

Gadgets Electronics till now applying traditional costing method to determine the total cost and cost per unit of each gadget. Company wants to switch to ABC system in order to understand the accurate performance of each gadget. You have given this job to compare between both costing methods in order to determine which product is more profitable to the company and which one is least.

Production detail: -

Company produces 10,000 units of headphone; 5,000 units of microphone; 50,000 units of memory sticks and 20,000 units of webcam.

Overheads, Activity and Cost Driver Details: -

1. The labour hour per units 0.10 for headphone; 0.15 for microphone; and 0.05 for memory stick and 0.20 for webcam.
2. The production costs incurred RO 3,800. Number of machines runs 25 times for headphone; 20 times for microphone; 40 times for memory stick and 45 times for webcam.
3. The assembly costs incurred RO 2,500. Labor on assembly of components 75 hours for headphone; 25 hours for microphone; 50 hours for memory stick; 60 hours for webcam.
4. The testing costs incurred RO 1,400. The company tested all the units manufactured.
5. The packaging costs incurred RO 1,200. All the gadgets are separately packed.

Prime Cost Details: -

1. RO 1.500 per unit on direct materials and RO 1.250 per unit on direct labour paid for headphone.
2. RO 0.750 per unit on direct materials and RO 0.500 per unit on direct labour paid for microphone.
3. RO 0.500 per unit on component materials and RO 0.250 per unit on direct labour paid for memory stick.
4. RO 1.750 per unit on direct materials and RO 1.500 per unit on direct labour paid for webcam.

Requirements: -

1. Calculate total cost and cost per unit of each gadget by applying absorption costing.

[5 Marks]

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

[5 Marks]

3. Calculate the selling price by adding 20% mark up on cost for all products. Also, analyze over costing and under costing for all gadgets. [2.5 + 2.5 Marks]