Question
Managers are considering about activity-based costing system, and have gathered the following information about the expected manufacturing overhead costs for next year. Assume annual product
Managers are considering about activity-based costing system, and have gathered the following information about the expected manufacturing overhead costs for next year. Assume annual product and sales volume remains the same for future years.
Table 3. Information for Activity- based Costing System
|
| Units of the cost driver | |
Activity Centers & Cost Drivers | Costs | Product A | Product B |
Center 1 (number of rooms) | $900,000 | 300,000 | 1,200,000 |
Center 2 (number of shipments) | $800,000 | 4,800 | 15,200 |
Center 3 (number of inspections) | $1,200,000 | 21,000 | 59,000 |
Center 4 (number of orders) | $800,000 | 110,000 | 50,000 |
Center 5 (number of hours) | $100,000 | 16,000 | 176,000 |
Center 6 (number of set-ups) | $1,000,000 | 4,000 | 6,000 |
Part A.
(1) Assign the per unit and total overhead costs to each product, based on activity-based costing system. (8 points) (2) Calculate the per unit and total manufacturing costs for each product based on activity-based costing system. (4 points)
Part B.
Based on the overhead costs assigned using activity-based costing system, (1) Re-prepare the income statement, using the format in Table 2 and assuming the same selling and admin expenses. (6 points) (2) Calculate the profit margin ratio (i.e., profit margin / sales) and net profit per unit, and compare the profitability of the two products (4 points). (3) Based on your calculations, update your suggestions to the managers (3 points)
Table 2. Company X Income Statement 2019
Income Statement | |||
Year Ended Dec. 31, 2019 | |||
Product A | Product B | Total | |
Sales (4,000 * $1,260 each); (22,000 * $900 each) | $5,040,000 | $19,800,000 | $24,840,000 |
Less: Cost of Goods Sold ($940*4,000); ($720 * 22,000) | ($3,760,000) | ($15,840,000) | ($19,600,000) |
Gross Margin | $1,280,000 | $3,960,000 | $5,240,000 |
Less: Selling and administrative expenses | ($780,000) | ($264,000) | ($1,044,000) |
Net Profit (a) | $500,000 | $3,696,000 | $4,196,000 |
Units produced and sold (b) | 4,000 | 22,000 | |
Net Profit per unit (a / b) | $125 | $168 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started