Management Accounting Questions

Speedy Products manufactures three types of CD players: BC, EC and DE. The company uses an activity-based product costing system. Speedy Products has identified five activities. Each activity, its cost and related activity driver are identified below:

Activity Cost Activity Driver

Material handling $225,000 Number of parts

Material insertion $2,475,000 Number of parts

Automated machinery $840,000 Machine hours

Finishing $170,000 Labour hours

Packaging $170,000 Orders shipped

The following information is related to each product line of CD players:

BC EC DE

Units to be produced 10,000 5,000 2,000

Orders to be shipped 1,000 500 200

Number of parts per unit 10 15 25

Machine hours per unit 1 3 5

Labour hours per unit 2 2 2

Required:

a. Calculate the activity cost driver rates. Show all calculations.

b. If the prime cost of EC is $50 per unit, use your answer to part (a) to calculate the cost per unit of EC. Show all calculations.

c. Provide two reasons why traditional costing systems tend to under-estimate the cost of low-volume, complex products and over-estimate the cost of high-volume, simple products.

d. Outline and explain three circumstances in which the benefits from ABC will be greatest.