The Production Manager has come to you all inspired from a conference she has just been on about Activity Based Costing (ABC).  The conference focus was on the costs and benefits of implementing the ABC method.  The Production Manager has asked for you to prepare an analysis comparing two products that Uno Direction make a soft shell pencil case and a tin pencil case.

 

The firm has always applied overhead (OH) to products based on direct labour-hours (DLH) as a cost driver.  The following data summaries the company’s sales and cost estimated for 2020.

 

2020 Sales and Cost estimates	Soft Shell Pencil Case	Tin Pencil Case
Forecast Sales (Units)	400,000	40,000
Selling price per unit($)	$6.00	$10.00
Prime Costs per unit	$3.00	$4.00
DLH per Unit	0.25	0.25
OH per DLH	$4.00	$4.00

 

OH Activity	OH Cost	Cost Driver	Amount of Cost Driver
			Soft Shell Pencil Case	Tin Pencil Case
Machining Set-Ups	$200,000	Number of Setups	50	200
Electronic assembly	$70,000	Machine Hours	30,000	70,000
Quality control	$135,000	Labour Hours	150,000	250,000
Packaging	$35,000	Number of Orders	2,600	3,400
Total $ Overhead	$440,000

 

Required:

(i) Using the current factory-wide cost driver method of applying overhead develop a spreadsheet to calculate for each product the expected:

a) Gross Profit per unit,

b) Gross Profit margin ($GP/$Sales),

c) Total Gross Profit per Model, and

d) Total Firm Gross Profit.       

 

(ii)Using the activity cost data provided conduct the same analysis utilising ABC techniques to again calculate for each model the expected:

a) Gross Profit per unit,

b) Gross Profit margin ($GP/$Sales),

c) Total Gross Profit per Model, and

d) Total Firm Gross Profit.        

 

(iii)  Write a brief report comparing the two methods and decide which method would be most suitable for Uno Direction.        

(iv) What are some of the difficulties that Uno Direction may comfort if they tried to implement ABC into their manufacturing process?