LIVE UCIUI ing di 10 OD dation on an expansion strategy? CEMENT 05-15 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT, AUTOMOTIVE SUPPLIER O'Sullivan Company is an automotive component supplie motive component supplier. O'Sullivan has been approached by Honda Canada's Alliston, Ontario, plant to consider expanding its production of part 2422 to a total annual quantity of 2.000 units. This part is a low-volume, complex product with a high gross margin that is based on a proposed (quoted) unit sales price of $7.50. O'Sullivan uses a traditional costing system that allocates indirect manufacturing costs based on direct labour costs. The rate currently used to allocate indirect manufacturing costs is 400 percent of direct labour cost. This rate is based on the $3,200,000 annual factory overhead cost divided by $800,000 annual direct labour cost. To produce 2,000 units of 24Z2 requires $5,000 of direct materials and $1,000 of direct labour. The unit cost and gross margin percentage for part 24Z2 based on the traditional cost system are computed as follows: Per Unit (+2,000) Total Direct materials Direct labour Indirect production: (400% direct labour) Total cost Sales price quoted Gross margin Gross margin percentage $ 5,000 1,000 4,000 $10,000 $2.50 0.50 2.00 $5.00 33,3% Cost Allocation and Activity Based Costing Systems AU The management of O'Sullivan decided to examine the effectiveness of their traditional ing system versus an activity-based costing system. The following data have been collected a team consisting of accounting and engineering analysts: Factory Overhead Costs (annual) Activity Centre $ 500,000 Quality 50,000 Production scheduling 700,000 Setup 300,000 Shipping Shipping administration 50,000 Production 1,600,000 Total indirect production cost $3,200,000 Activity Centre: Cost Drivers Annual Cost-Driver Quantity Quality: Number of pieces scrapped 10,000 Production scheduling and setup: Number of setups 500 Shipping: Number of containers shipped 60,000 Shipping administration: Number of shipments 1,000 Production: Number of machine-hours 10,000 The accounting and engineering team has performed activity analysis and provides the for lowing estimates for the total quantity of cost drivers to be used to produce 2,000 units of par 2472: Cost-Driver Consumption 120 Cost Driver Pieces scrapped Setups Containers shipped Shipments Machine-hours REQUIRED 1. Prepare a schedule calculating the unit cost and gross margin of part 24Z2 using the ac based costing approach. 2. Based on the ABC results, which course of action would you recommend regar proposal by Honda Canada? List the benefits and costs associated with implem ABC system at O'Sullivan. using the activity end regarding the plementing an
