1)

MANUFACTURING OVERHEAD COST PER UNIT

PRODUCT TRADITIONAL ABC
HOLLOW CENTER 0.35 0.52
SOLID CENTER 0.53 0.44

WORKINGS:

TRADITIONAL COSTING
Purchasing of materials 200,000.00
Set-up of machines 350,280.00
Packaging 300,000.00
Testing 270,000.00
Cleaning & Maint. 288,540.00
Total Overhead Cost $ 1,408,820.00

HOLLOW CENTER SOLID CENTER

Units Produced 1,000,000.00 2,000,000.00
Direct Labor per Unit 0.38 0.57
Direct Labor in ($) 378,000.00 1,134,000.00
Total Direct Labor required 1,512,000.00

PREDETERMINE OH RATE $ 0.93

TRADITIONAL COSTING - OVERHEAD COST PER UNIT

HOLLOW CENTER SOLID CENTER
Units Produced 1,000,000.00 2,000,000.00
TOTAL MANUFACTURING
OVERHEAD COST 352,205.00 1,056,615.00
MANUFACTURING OVERHEAD
COST PER UNIT 0.35 0.53

2) ACTIVITY-BASED COSTING
MAT.PURCHASE SET-UP PACKAGE TESTING
Overhead Cost 200,000.00 350,280.00 300,000.00 270,000.00
Volume 100 252 2,500,000 3000
Activity Based Rate 2,000.00 1,390.00 0.12 90.00

ACTIVITY-BASED COSTING - OVERHEAD COST PER UNIT

HOLLOW CENTER SOLID CENTER
Units Produced 1,000,000.00 2,000,000.00
Manufacturing Overheads: - -
MAT.PURCHASE 100,000.00 100,000.00
SET-UP 175,140.00 175,140.00
PACKAGE 60,000.00 240,000.00
TESTING 90,000.00 180,000.00
CLEAN&MAINT. 96,180.00 192,360.00
TOTAL MANUFACTURING
OVERHEAD COST 521,320.00 887,500.00
MANUFACTURING OVERHEAD
COST PER UNIT 0.52 0.44
CLEAN&MAINT.
288,540.00
252
1,145.00
1) Calculate the profit using traditional costing
TRADITIONAL COSTING

Run Machine 510,000.00 VANILLA

Production Run 144,000.00 Units Produced 50,000
Set Up Machine 520,000.00 DL hrs per units 0.02
Support Products 101,000.00 Direct Labor Hrs Req. 1,000.00
Total Overhead Cost 1,275,000.00 Total 1,020.00

PREDETERMINED
OVERHEAD RATE $ 1,250.00

PROFIT (TRADITIONAL COSTING)

MOCHA-
VANILLA ALMOND TOTAL
Units Produced 50,000 1,000 51,000
Sales 1,500,000 50,000 1,550,000
Direct Labors 50,000.00 1,000.00 51,000
Direct Materials 300,000.00 10,000.00 310,000
Manufacturing OH 1,250,000.00 25,000.00 1,275,000
GROSS PROFIT (100,000.00) 14,000.00 (86,000.00)

2) Calculate the profit using ABC

RUN MACHINE PROD.RUN SET-UP MACHINE SUPPORT PROD.

Overhead Cost 510,000.00 144,000.00 520,000.00 101,000.00
Volume 510.00 60.00 260.00 2.00
Activity-Cost Driver Rate 1,000.00 2,400.00 2,000.00 50,500.00

PROFIT (ABC)
MOCHA-
VANILLA ALMOND TOTAL
Units Produced 50,000 1,000 51,000
Sales 1,500,000 50,000 1,550,000
Direct Labors 50,000.00 1,000.00 51,000
Direct Materials 300,000.00 10,000.00 310,000
Manufacturing Overhead:
RUN MACHINE 500,000.00 10,000.00 510,000
PROD.RUN 120,000.00 24,000.00 144,000
SET-UP MACHINE 400,000.00 120,000.00 520,000
SUPPORT PROD. 50,500.00 50,500.00 101,000
GROSS PROFIT 79,500.00 (165,500.00) (86,000.00)

3) Under traditional costing, manufacturing overheads are allocated based on direct labor hours.
As a result, traditional costing overcosted its Vanilla product & undercosted its Mocha-Almond product.
Mocha-Almond is a small-volume product but consumes a lot of batch-related support also its product-sustaining cost is the same as "V
In addition, using traditional costing, high-volume product "Vanilla" subsidizes the low-volume product "Mocha-Almond".
In other words, Vanilla bears some of the cost which is consumed by Mocha-Almond.

On the other hand, under ABC, manufacturing overheads are allocated based on each cost driver or activity.
As a result, manufacturing overhead is calculated in detailed according to each activity & based on each corresponding cost driver.

According to above data, Vanilla is a profitable product.

The company may improve its profits by:
1) Increase the production batch size for Mocha by encouraging retailers/distributors to place large order.
By that, batch-related costs will be reduced by increasing the batch size.
2) Offer discount for Mocha-Almond product. Selling the product at low-cost attracts customers and will increase the sales.
Eventually the overall profit will compensate the overheads costs.
2) Improve the efficiency of production by reducing activity cost driver rate.
For example, train set-up workers in order to reduce the cost for each machine set-up hour.
 MOCHA-
ALMOND
1,000
0.02
20.00

-sustaining cost is the same as "Vanilla".

t "Mocha-Almond".
h corresponding cost driver.

ill increase the sales.

1)
Machine Set-ups 170,000.00
Engineering Changes 320,000.00
Inspect & Packing 470,000.00
$ 960,000.00

ALPHAS BETAS ZEBAS

Units Produced 1,000.00 3400 600
Machine Hours 43.00 30 25
Estimated Machine Hrs 43,000.00 102,000.00 15,000.00
Grand Total 160,000.00

Plant-Wide Overhead Rate $ 6.00

TRADITIONAL COSTING - PRODUCTION COST

ALPHAS BETAS ZEBAS
Units Produce 1,000 3,400 600
Direct Labor 900,000.00 1,904,000.00 510,000.00
Direct Materials 680,000.00 1,020,000.00 438,000.00
Production Overhead 258,000.00 612,000.00 90,000.00
Total Production Cost 1,838,000.00 3,536,000.00 1,038,000.00
Production Cost per Unit 1,838.00 1,040.00 1,730.00

TRADITIONAL COSTING - PRODUCTION COST PER UNIT

ALPHAS BETAS ZEBAS
Units Produce 1,000 3,400 600
Direct Materials 680.00 300.00 730.00
Direct Labor 900.00 560.00 850.00
Production Overhead 258.00 180.00 150.00
Production Cost per Unit 1,838.00 1,040.00 1,730.00

2) SET-UPS ENGINEERING INSPECT&PACK

170,000.00 320,000.00 470,000.00
Volume 34.00 400.00 5,000.00
Activity-Based Cost Rate 5,000.00 800.00 94.00

ACTIVITY-BASED COSTING
ALPHAS BETAS ZEBAS
Units Produce 1,000 3,400 600
Direct Material 680,000 1,020,000 438,000
Direct Labor 900,000 1,904,000 510,000
Manufacturing Overhead:
SET-UPS 25,000.00 45,000.00 100,000.00
ENGINEERING 112,000.00 6,400.00 201,600.00
INSPECT&PACK 94,000.00 319,600.00 56,400.00
Total Manufacturing Cost 1,811,000.00 3,295,000.00 1,306,000.00
Manufacturing Cost per Unit 1,811.00 969.12 2,176.67
Selling Price 400
Costs
Direct Materials (2 oz plastic @ €40 per oz) 80
Direct Labour (1 hour @ €20 per hour) 20
Variable Overhead (1 hour @ €8 per hour) 8
Fixed Overhead (1 hour @ €20 per hour) 20
Standard Cost Per Lense 128
Standard Profit Per Lense 272

1) Sales Price Variance

Actual Unit Price 450
Budgetted Unit Price 400
50 ACTUAL 900,000.00
Actual Units Sold 2000 BUDGET 800,000.00
Sales Price Variance 100,000 F 100,000.00 F

2) Sales Volume Variance

Actual Unit Sold 2000
Budgetted Unit Sold 3000
1000 ACTUAL 544,000.00
Standard Contribution per Unit 272 BUDGET 816,000.00
Sales Volume Variance 272,000 U 272,000.00 U

3) Direct Materials Price Variance

Actual Materials Unit Price 38
Budgetted Materiasl Unit Price 40
2 ACTUAL 167,200.00
Actual Units Purchased 4400 BUDGET 176,000.00
Direct Materials Price Variance 8,800 F 8,800.00 F

4) Direct Materials Usage Variance

Actual Materials Usage 4400
Budgetted Materials Usage 4000
400 ACTUAL 176,000.00
Standard Units Cost 40 BUDGET 160,000.00
Direct Materials Usage Variance 16,000 U 16,000.00 U

5) Direct Labour Rate Variance

Actual Labor Unit Price 24
Budgetted Labor Unit Price 20
4 ACTUAL 43,200.00
Actual Labour Unit Hrs 1800 BUDGET 36,000.00
Direct Labour Rate Variance 7,200 U 7,200.00 U

6) Direct Labour Efficiency Variance

Actual Labours Hrs 1800
Budgetted Labor Hrs 2000
200 ACTUAL 36,000.00
Standard Units Cost 20 BUDGET 40,000.00
Direct Labour Efficiency Variance 4,000 F 4,000.00 F

7) Variable Overhead Expenditure Variance

Actual Overhead Unit Price 10
 Budgetted Overhead Unit Price 8
2 ACTUAL 18,000.00
Actual Overhead Unit Hrs 1800 BUDGET 14,400.00
Variable Overhead Expenditure Variance 3,600 U 3,600.00 U

8) Variable Overhead Efficiency Variance

Actual Labours Hrs 1800
Budgetted Labor Hrs 2000
200 ACTUAL 14,400.00
Standard Units Cost 8 BUDGET 16,000.00
Variable Overhead Efficiency Variance 1,600 F 1,600.00 F

9) Fixed Overhead Expenditure Variance

Actual Fixed Overhead Unit Price 13.33
Budgetted Fixed Overhead Unit Price 20
6.67 ACTUAL 40,000.00
Budgetted Sales Unit 3000 BUDGET 60,000.00
Variable Overhead Expenditure Variance 20,000 F 20,000.00

10) Fixed Overhead Volume Variance

Actual Units Produced 2000
Budgetted Units Produced 3000
1000 ACTUAL 40,000.00
Standard Units Cost 20 BUDGET 60,000.00
Variable Overhead Efficiency Variance 20,000 F 20,000.00 U
COSTING STATEMENT
BUDGETTED SALES 816,000.00
VARIANCES
1) Sales Price Variance 100,000 correct
2) Sales Volume Variance (272,000) correct
3) Direct Materials Price Variance 8,800.00 correct
4) Direct Materials Usage Variance (16,000.00) correct
5) Direct Labour Rate Variance (7,200.00) correct
6) Direct Labour Efficiency Variance 4,000.00 correct
7) Variable Overhead Expenditure Variance (3,600.00) correct
8) Variable Overhead Efficiency Variance 1,600.00 correct
9) Fixed Overhead Expenditure Variance 20,000.00 corrected
10) Fixed Overhead Volume Variance (20,000.00) corrected
ACTUAL PROFIT $ 631,600.00