Problem 4.

34 Product-Costing Accuracy, Corporate Str

Autotech Manufacturing is engaged in the production of replacement parts for automobiles

of activity, and for many years it was the only part produced by the plant. Five years ago,
increased for the first three years after the addition of the new product. In the last two yea
loss in the most recent reporting period.
Much of the competition was from foreign sources, and the plant manager was convinced
between Patty Goodson, plant manager, and Joseph Fielding, divisional marketing manage

After her meeting with Joseph, Patty requested an investigation of the production costs an
three-month assessment, the consulting group provided the following information on the p

Part #127
Production 500,000.00
Selling Price $ 31.86
Overhead Perunit $ 12.83
Primce cost per unit $ 8.53
 number of production ru 100.00
receiving orders 400.00
machine hours 125,000.00
direct labor hours 250,000.00
Engineering hours 5,000.00
Material moves 500.00

The consulting group recommended switching the overhead assignment to an activity-base

decision making. To facilitate this recommendation, it grouped the plant’s activities into ho

Overhead
Setup Costs $ 240,000.00
Machine Costs $ 1,750,000.00
Receiving costs $ 2,100,000.00
Engineering costs $ 2,000,000.00
Materials handling costs $ 900,000.00
Total $ 6,990,000.00

1. Verify the overhead cost per unit reported by the consulting group using direct labor

1.1 Overhead rate

Answer :
Overhead rate : $ 25.65 per direct labour hour

overhead assignment :

Part#127 $ 12.83 per unit

Part#234 $ 5.77 per unit

Unir gross margin Part #127 Part #234

Selling price $ 31.86 $ 24.00
Cost : $ 21.36 $ 12.03
Total Gross marg $ 10.50 $ 11.97
 After learning of activity-based costing, Patty asked the controller to compute the prod
2.
unit gross margin for each product.
Answer :

Activities Cost Driver

Setup Costs Runs
Machine Costs machine hours
Receiving costs receiving orders
Engineering costs Engineering hours
Materials handling costs Material moves
Total

overhead assignment : Part #127

Setup Costs $ 80,000.00
Machine Costs $ 1,182,500.00
Receiving costs $ 600,000.00
Engineering costs $ 1,000,000.00
Materials handling costs $ 500,000.00
Total Overhead Cost $ 3,362,500.00
Unit Produce 500,000.00
Overhead Perunit $ 6.73
Primce cost per unit $ 8.53
Unit cost : $ 15.26
Selling Price $ 31.86
Cost : $ 15.26
Gross Margin (loss) $ 16.61

Should the company switch its emphasis from the high-volume product to the low-vol
3.
making Part #127

Answer :

Explanation :

No, based on the above calculation it can be seen that product #127 has a cost of $15
sales per unit to be the same as competitors, the company can benefit from the cost v

4. Explain the apparent lack of competition for Part #234. Comment also on the willingne

Answer :
 Explanation :

based on activity-based unit costing, product #234 has a cost of $42.54, which is high
per unit are greater than the sales per unit. This also explains that we cannot accept o
while the unit costs incurred are the same, namely $42.45

5. Assume that you are the manager of the plant. Describe what actions you would take

Answer :

Explanation :

based on the data from the two activities above, the manager must reduce the selling
increased so that costs can be covered properly to maintain the company's profit leve
that the selling value of the product can be increased above the competitor's price.
, Corporate Strategy, ABC

nt parts for automobiles. One plant specializes in the production of two parts: Part #127 and Part #
e plant. Five years ago, Part #234 was added. Part #234 was more difficult to manufacture and req
duct. In the last two years, however, the plant faced intense competition, and its sales of Part #127

anager was convinced that the foreign producers were guilty of selling the part below the cost of pr
onal marketing manager, reflects the concerns of the division about the future of the plant and its p

the production costs and comparative efficiency. She received approval to hire a consulting group t
ng information on the plant’s production activities and costs associated with the two products:

Part #234
100,000.00
$ 24.00 selling price pesaing $ 20.00
$ 5.77 selisih $ 11.86
$ 6.26
 200.00
1,000.00
60,000.00
22,500.00
5,000.00
400.00

ment to an activity-based approach. It maintained that activity-based cost assignment is more accu
plant’s activities into homogeneous sets with the following costs:

roup using direct labor hours to assign overhead. Compute the per-unit gross margin for each prod

overhead assignment = overhead rate x (consumtion ratio)

consumtion ratio = based activity/unit product
ler to compute the product cost using this approach. Recompute the unit cost of each product using

activity rate
$ 800.00 per run activity rate = $cost per activi
$ 9.46 $ 9.46 rounded
$ 1,500.00
$ 200.00
$ 1,000.00

Part #234
$ 160,000.00
$ 567,600.00
$ 1,500,000.00
$ 1,000,000.00
$ 400,000.00
$ 3,627,600.00
100,000.00
$ 36.28
$ 6.26
$ 42.54
$ 24.00
$ 42.54
$ -18.54

product to the low-volume product? Comment on the validity of the plant manager’s concern that

#127 has a cost of $15.26 which is less than the sales per product offered by competitors. This me
benefit from the cost value of product #127.

ent also on the willingness of customers to accept a 25 percent increase in price for Part #234
of $42.54, which is higher than product #127. In this case, no competitor will sell his goods at a pr
that we cannot accept offers from consumers for a 25% price increase because the increase in sale

actions you would take based on the information provided by the activity-based unit costs.

must reduce the selling price per unit #127 so that the company can compete, while product #234
e company's profit level. managers can focus on product #127 by taking a number of strategic step
e competitor's price.
art #127 and Part #234. Part #127 produced the highest volume
manufacture and required special tooling and setups. Profits
ts sales of Part #127 dropped. In fact, the plant showed a small

below the cost of producing it. The following conversation

of the plant and its products.

a consulting group to make an independent investigation. After a

e two products:
gnment is more accurate and will provide better information for

margin for each product.

of each product using activity-based costing. Compute the per-

te = $cost per activity/cost driver per activity

ager’s concern that competitors are selling below the cost of

competitors. This means that if the manager sets the

e for Part #234

 ell his goods at a price of $24 because the costs incurred
the increase in sales is only $30 (after a 25% increase)

d unit costs.

while product #234 the selling price per unit must be

ber of strategic steps, such as marketing the product so
1. Overhead rates per direct labour using Direct Method
Notes :
1. overhead based on direct labor hours

Production departmen
Molding Assembly
Employs 20 80
work hours 400 1600
overhead cost $ 190,000.00 $ 80,000.00

Support Departmens
Engineering General Factory
Budget Cost $ 216,000.00 $ 370,000.00

Support Departmens Production departmen

Engineering General Factory Molding
Engineering hours - 2,000.00 2,000.00
Square feet 120,000.00 420,000.00

Proportion of Driver Used by

Support Departmens Production departmen
Engineering General Factory Molding
Engineering hours 0.20
Square feet 0.88

Allocated
Support Departmens Production departmen
Engineering General Factory Molding
Budge Cost $ 216,000.00 $ 370,000.00 $ 190,000.00
Allocated :
Engineering hours - 216,000.00 43,200.00
Square feet - 370,000.00 323,750.00
Total $ - $ - $ 556,950.00

Overhead rates :
Allocated Production Dep $ 556,950.00
work hours 400
Overhead rates =
Overhead Cost/work
hours $ 1,392.38
2. Overhead rates per direct labour using Sequential Method of Allocation
Notes :
1. overhead based on direct labor hours

Production departmen
Molding Assembly
Employs 20 80
work hours 400 1600
overhead cost $ 190,000.00 $ 80,000.00

Support Departmens
Engineering General Factory
Budget Cost $ 216,000.00 $ 370,000.00

Support Departmens Production departmen

Engineering General Factory Molding
Engineering hours - 2,000.00 2,000.00
Square feet 120,000.00 420,000.00

Proportion of Driver Used by

Support Departmens Production departmen
Engineering General Factory Molding
Engineering hours 0.20
Square feet 0.20 0.70
General factory memberikan allocated ke engineering sebesar 20% dan general factory harus di 0 ka
ke dept enginerring dan dep produksi
Allocated
Support Departmens Production departmen
Engineering General Factory Molding
Budge Cost $ 216,000.00 $ 370,000.00 $ 190,000.00
Allocated :
Engineering hours - 290,000.00 - 370,000.00 58,000.00
Square feet $ 74,000.00 259,000.00
Total $ - $ - $ 507,000.00

Overhead rates :
Allocated Production Dep $ 507,000.00
work hours 400
Overhead rates =
Overhead Cost/work
$ 1,267.50
hours

3. Overhead rates per direct labour using Sequential Method of Allocation

Notes :
1. overhead based on direct labor hours

Production departmen
Molding Assembly
Employs 20 80
work hours 400 1600
overhead cost $ 190,000.00 $ 80,000.00

Support Departmens
Engineering General Factory
Budget Cost $ 216,000.00 $ 370,000.00

Support Departmens Production departmen

Engineering General Factory Molding
Engineering hours - 2,000.00 2,000.00
Square feet 120,000.00 420,000.00

A = $216.000+0,2(B)
B= $370.000+0,17(A)
A 290,000.00
0.97
A 300,000.00 Engineering
B 420,000.00 General Factory

Proportion of Driver Used by

Support Departmens Production departmen
Engineering General Factory Molding
Engineering hours 0.17 0.17
Square feet 0.20 0.70

Allocated
Support Departmens Production departmen
Engineering General Factory Molding
Budge Cost $ 216,000.00 $ 370,000.00 $ 190,000.00
Allocated :
Engineering hours - 300,000.00 50,000.00 50,000.00
Square feet $ 84,000.00 - 420,000.00 294,000.00
Total $ - $ - $ 534,000.00

Overhead rates :
Allocated Production Dep $ 534,000.00
work hours 400
Overhead rates =
Overhead Cost/work
$ 1,335.00
hours
oduction departmen
Assembly
8,000.00
60,000.00

sed by
oduction departmen
Assembly cek
0.80 1.00
0.13 1.00

oduction departmen
Assembly
$ 80,000.00

172,800.00
46,250.00
$ 299,050.00

46,250.00
1600

$ 28.91 Per direct labour hours

Allocation

oduction departmen
Assembly
8,000.00 17%
60,000.00 20%

sed by
oduction departmen
Assembly cek
0.80 1.00
0.10 1.00
general factory harus di 0 kan untuk di alokasikan

oduction departmen
Assembly
$ 80,000.00

232,000.00
37,000.00
$ 349,000.00

37,000.00
1600

$ 23.13 Per direct labour hours

Allocation
oduction departmen
Assembly
8,000.00 16.67%
60,000.00 20.00%

sed by
oduction departmen
Assembly cek
0.67 1.00
0.10 1.00

oduction departmen
Assembly
$ 80,000.00

200,000.00
42,000.00
$ 322,000.00

42,000.00
1600

$ 26.25 Per direct labour hours