Case Study 2

P & G, LLC is producing three products soap, handwash and moisturizing cream.

P & G till now applying traditional costing method to determine the total cost and cost per unit of each product. Company wants to switch to ABC system in order to understand the accurate performance of each product. 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 200,000 units of soaps; 150,000 units of handwash; 50,000 units of moisturizing cream.

Overheads, Activity and Cost Driver Details: -

(i) The labour hour per units 0.01 for soap; 0.02 for handwash; and 0.05 for moisturizing cream.

(ii) The production costs incurred RO 1,800. Number of machines runs 40 times for soaps; 50 times for handwash; 60 times for moisturizing cream.

(iii) The assembly costs incurred RO 1,500. Labor on assembly of components 150 hours for soaps; 200 hours for moisturizing cream; 180 hours for handwash.

(iv) The packaging costs incurred RO 1,200. All the products packed separately.

(v) The delivery costs incurred RO 1,000. No. of deliveries for soaps 40 times, for handwash 32 times and for moisturizing cream 18 times.

Prime Cost Details: -

(i) RO 0.075 per unit on direct materials and RO 0.038 per unit on direct labour paid for soap.

(ii) RO 0.450 per unit on direct materials and RO 0.075 per unit on direct labour paid for handwash.

(iii) RO 0.550 per unit on direct materials and RO 0.100 per unit on direct labour paid for moisturizing cream.

Requirements: -

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

[5 Marks]

2. Calculate the total cost and cost per unit of each product 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 products. [2.5 + 2.5 Marks]