Fizz Boats Ltd (FBL) manufactures speed boats for sale to the local market. The
ID: 2335624 • Letter: F
Question
Fizz Boats Ltd (FBL) manufactures speed boats for sale to the local market. The company produces three product lines, the Fisherman's Fizz, the Weekender Fizz and the Jetset Fizz. Currently, the company uses a traditional costing approach to allocate overheads, but the general manager, Jane Mattison, is concerned that the profits shown for each product line may not be accurate The factory supervisor has provided you with the following production details for the last year Under the current system the production overheads are allocated based on the total number of boats produced each y Fisherman's Fizz Weekender Fizz Jetset Fizz Annual units Price per boat Direct Materials per boat Direct labour per boat Total production overhead 750 $17,500 $7,000 $5,000 300 $25,000 10,000 100 $60,000 $20,000 $20,000 $1,200,000 Given the general manager's concerns, the factory manager has collected additional information regarding the different activities in the production process. Activity Product designer time (% of total) Machine hours per boat Boats per production run Number of inspections per boat Number of machine set-ups per production run Fisherman's Fizz Weekender Fizz Jetset Fizz 10% 100 250 40% 200 100 50% 300 10 12 10 He has also collated a breakdown of the production overhead cost by activity: Overhead Cost Overhead cost Product designer Machine set-up Machine maintenance (performed at the end of each production run) Machine running costs Inspections Rent Total Overheads $220,000 $160,000 145,000 $175,000 $200,000 300,000 $1,120,000Explanation / Answer
a calculation of the total gross profit for each product line using traditional costing Fisherman's Fizz Weekender Fizz JetSet Fizz Annual Units produced 750 300 100 DM Per Boat $7,000 $10,000 $20,000 Calculation of allocation of Overheads DL Per Boat $5,000 $8,000 $20,000 Price per boat $17,500 $25,000 $60,000 Total Units 1150 Total revenue Total Production OH $1,200,000 Annual Units*Price per boat $13,125,000 $7,500,000 $6,000,000 Cost per unit $1,043.48 Total DM $5,250,000 $3,000,000 $2,000,000 Total DL $3,750,000 $2,400,000 $2,000,000 Production OH 750*1043 $782,250 300*1043 $312,900 100*1043 $104,300 Total Costs $9,782,250 $5,712,900 $4,104,300 Gross Profit $3,342,750 $1,787,100 $1,895,700 b Prepare an activity based cost analysis for the three product lines for the yr Allocation of Cost Drivers Product Designer Product Designer time (% of total) Machine Set up No of machines set ups per prod run machine Maintenance Boats per production run machine running cost machine hrs per boat Inspections no of inspections per boat Rent Equally distributed Normally rent is allocated based on the number of square footage .But in absence of the required information it is assumed that it is equally subdivided among the three products Fisherman's Fizz Weekender Fizz JetSet Fizz Annual Units produced 750 300 100 DM Per Boat $7,000 $10,000 $20,000 Calculation of OH Cost DL Per Boat $5,000 $8,000 $20,000 Price per boat $17,500 $25,000 $60,000 Product Designer $220,000 Total revenue Fisherman Fizz 10% $22,000 Annual Units*Price per boat $13,125,000 $7,500,000 $6,000,000 Weeknender Fizz 40% $88,000 Total DM $5,250,000 $3,000,000 $2,000,000 JetSet Fizz 50% $110,000 Total DL $3,750,000 $2,400,000 $2,000,000 100% Product Designer $22,000 $88,000 $110,000 Machine Set Up $26,666.67 $44,444.44 $88,888.89 Machine Set Up $160,000 machine Maintenance $100,694.44 $40,277.78 $4,027.78 No of Machine Set ups Machine Running Costs $29,166.67 $58,333.33 $87,500 Fishermann Fizz 3 $26,666.67 Inspections $23,529.41 $35,294.12 $141,176.47 Weekend Fizz 5 $44,444.44 Rent $100,000 $100,000 $100,000 JetSet Fizz 10 $88,888.89 Total Cost $9,302,057 $5,766,350 $4,531,593 18 Gross Profit $3,822,943 $1,733,650 $1,468,407 machine Maintenance $145,000 Boats per prod Run Fishermann Fizz 250 $100,694.44 C-i Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them Weekend Fizz 100 $40,277.78 JetSet Fizz 10 $4,027.78 ii Unit Level - Activities performed in proportion to the volume of units produced. 360 Machine Running Costs $175,000 Batch Level - Activities performed in proportion to the number of production or support batches, independent of the number of unites produced in the batch. Machine Hrs per boat Fishermann Fizz 100 $29,166.67 Product sustaining Level - Activities performed to support a product portfolio, independent of the number of units produced or production batches. Weekend Fizz 200 $58,333.33 JetSet Fizz 300 $87,500 Facility sustaining Level - Activities performed to maintain a facility, independent of the number of units produced, production batches and products carried by the facility. 600 iii Based on the analysis above it can be seen that the machine set up ,machine running cost and inspections are the best Inspections $200,000 as it points out to the number of set up,machine running cost and inspections which are needed for production of the no of inspections per boat three products which can be optimised based on the cost allocation drivers choosen. Fishermann Fizz 2 $23,529.41 Iv As per the ABC Analysis which is prepared in B as compared to Weekend Fizz 3 $35,294.12 A is the product Fishermann Fizz profit have increased as compared to Weekend Fizz and JetSet Fiz JetSet Fizz 12 $141,176.47 17 Rent $300,000 Equally $100000 each
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