Question 4

Exhibit 4
Cost Drivers Valves Pumps Flow Con Total
Production (units) 7,500 12,500 4,000 24,000
Machine hours 3,750 6,250 1,200 11,200
Production runs 10 50 100 160
Production runs 10 50 100 160
Number of shipments 10 70 220 300
Hours of engineering work 250 375 625 1,250

Traditional Method
Particulars Valves Pumps Flow Con
# of units 7,500 12,500 4,000 Exhibit 4
Actual Selling Price 86 87 105 Exhibit 2
Sales 645,000 1,087,500 420,000
Direct Labour 75,000 156,250 40,000 Exhibit 3
Direct Material 120,000 250,000 88,000 Exhibit 3
Total Direct costs 195,000 406,250 128,000
Overhead costs @300% of DL 225,000 468,750 120,000
Total Costs 420,000 875,000 248,000
Profit 225,000 212,500 172,000
Actual Gross Margin % 35% 20% 41%
 From Exhibit 1
Activity Total Expenses Per unit

Machine-related expenses 336,000 30

Setup labor 40,000 250
Receiving and production control 180,000 1,125
Packaging and shipping 150,000 500
Engineering 100,000 80

ABC Method
Particulars Valves Pumps Flow Con
# of units 7,500 12,500 4,000
Actual Selling Price 86 87 105
Sales 645,000 1,087,500 420,000
Direct Labour 75,000 156,250 40,000
Direct Material 120,000 250,000 88,000
Total Direct costs 195,000 406,250 128,000
Overhead costs
Machine-related expenses 112,500 187,500 36,000
Setup labor 2,500 12,500 25,000
Receiving and production control 11,250 56,250 112,500
Engineering 20,000 30,000 50,000
Packaging and shipping 5,000 35,000 110,000
Total Costs 346,250 727,500 461,500
Profit 298,750 360,000 (41,500)
Actual Gross Margin % 46% 33% -10%
Exhibit 4
Exhibit 2

Exhibit 3
Exhibit 3
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