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Foresting produces 2 types of products, Kamp and Lamp. It expects to produce 40.000 units of Kamp and 28,000 units of Lamp. Total direct material
Foresting produces 2 types of products, "Kamp" and "Lamp". It expects to produce 40.000 units of Kamp and 28,000 units of Lamp. Total direct material cost in 2012 is expected to be $120.00 per unit for Kamp and $170.00 per unit for Lamp. Forest expects to pay total wages of $1,200,000 for Kampand $420,000 for Lamp. Other manufacturing costs are considered as overhead. The estimated total annual overhead for the vear is $5.400.000. Currently. Forestallocates its overheads based on direct labour hours. Kamprequires 2direct labour hours, whilst Lamprequires 1 direct labour hours per unit to complete. The company is considering the use of activity-based costing (ABC) system to allocate all its overheads based on the following information Lamp Total de ser units) Overhead includes: (Cos Driver Bergy (eachine hours) Setup No or inspection) Total Costs (5) 3.800.000 200.000 Toti driver units) 15.000 NG 60.000 1.400.000 (Square metres) 50,000 m 1 50,000 m Required: (a)Calculate the total cost of each product(assuming that the expected no. of units are produced) using the traditional costing system. (4 marks) (b)Calculate the total cost of each product(assuming that the expected no. of units are produced) using the activity-based costing system c)Suppose the company decides to use ABC to set their selling price. What would be the minimum selling price per unit for each product if the company requires a gross profit margin of 40% for all products? (2 marks) (d)Explain the concept of ABM. "Increasing the number of indirect cost pools is guaranteed to sizably increase the accuracy of product costs." Do you agree with this statement. Explain your answer. When implementing ABC/ ABM, management must consider human behavior as well. Why? (Word limit: 500). (7 marks)
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