Muffintop Company makes two types of snack cake, the poppy seed and the blueberr
ID: 2400993 • Letter: M
Question
Muffintop Company makes two types of snack cake, the poppy seed and the blueberry. Basic production information follows:
Poppy seed Blueberry
Direct materials cost per unit $0.75 $0.85
Direct labor cost per unit $0.25 $0.25
Sales price per unit $2.50 $2.50
Expected production per month 140,000 units 190,000 units
Muffintop has monthly overhead of $135,000, which is divided into the following cost pools:
Setup costs $50,000
Quality control 28,300
Maintenance 37,800
Engineering 18,900
Total $135,000
The company has also compiled the following information about the chosen cost drivers:
Poppy seed Blueberry Total
Number of setups required 40 60 100
Number of inspections 75 350 425
Number of machine hours 1,500 750 2,250
Number of Engineering hours 65 70 135
Required:
a) Calculate Muffintop’s gross margin per unit for each product under the traditional costing system. The cost driver for the overhead in the traditional method is machine hours.
b) Calculate Muffintop’s gross margin per unit for each product under the activity based costing system.
c) Compare the gross margin of each product under the traditional system and ABC.
d) Explain the pros and cons of using activity based costing.
Explanation / Answer
;a) Gross Margin Per Unit Under Traditional costing System
The overhead of 135000 is apportioned based on the machine hours used in the department
b) Activity based costing system
75:350
c) Comparison of Gross margin under both the systems
d)
The problems and consequenses of using ABC are listed below
1. The information generated by the ABC may not be always in confirmation with the generally accepted accounting principles
2. Identifying the cost driver and collecting data for the same is a very time consuming process
3. The information generated by the ABC may be in conflict with the managerial performance standards established by the traditional system
4. Its is not usefull for all companies where Overhead costs are very less to compared with operating cost
Puppy Seed Bluberry Sales Price per Unit 2.5 2.5 Less: Direct material 0.75 0.85 Less: Direct labour 0.25 0.25 (A) 1.5 1.4 Expected Production (B) 140000 190000 (A) x (B) = (C) 210000 266000 Less: Overhead (D) (135000x1500/2250) 90000 (135000x750/2250) 45000 Gross Contribution margin (C) - (D) = (E) 120000 221000 Gross Contribution margin per Unit (E)/(B) 0.8571 1.1631Related Questions
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