Problem #1 (Activity-Based Costing)

Anderson Company manufactures two products, for which the following estimated information for next year is available.

		Regular		Deluxe
	Selling Price	$90		$130
	Number of Units	45,000		5,000
	Direct Material per unit	$30		$45
	Direct Labor per unit	$20		$20
	DLH per unit	2		2
	MH (total)	2,000		3,000
	Units per batch	450		100
	Number of batches	45,000/450=100		5,000/100=50

A machine is setup once for each batch and the setup is the same regardless of the type of product. There is one inspection performed for each batch and the inspection time is 1.5 hour for the deluxe product and hour for the regular product. The company purchases raw materials by batch. The purchasing agent has to make eight purchase orders per batch for deluxe product, and four purchase orders per batch for regular product.

The company is considering switching to an ABC system. A recent cost study revealed the company expects $780,000 of overhead next year from the following activities:

	Activity	Annual Cost Activity Driver
	Purchasing	$100,000 # of purchasing orders (per batch)
	Quality Control	$150,000 # of inspection hours (per batch)
	Production Set-ups	$30,000 # of setups (per batch)
	Machine Maintenance	$500,000 # of machine hours (total)
	TOTAL	$780,000

Activity	Total Cost	Total drivers	Regular drivers	Deluxe drivers	Activity rate	Consumption ratios
Purchasing	$100,000
Quality Control	$150,000
Production Set-ups	$30,000
Machine Maintenance	$500,000
TOTAL	$780,000

Requirements:

1. Assign OH cost for Regular Model using activity rates (show your work).

2. Assign OH cost for Deluxe Model using consumption ratios (show your work).

3. Determine the gross profit (per unit) of the Regular and Deluxe models using the ABC information.

Standard

Deluxe

Anderson Company wants to implement reduced approximately relevant ABC system by using the two most expensive activities for cost assignment. Under this new approach, what is the overhead cost assigned to Deluxe Model? (show your work).