Muffintop Company makes two types of snack cake, the poppy seed and the blueberr
ID: 2405574 • 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
Advantage of ABC.
1. Activity Based Costing helps to reduce costs by providing meaningful information on the opportunities available for reducing costs.
2. Activity Based Costing is working only on the activities. Hence, the management can take the quality decision by knowing the nature of each activity.
3. The activities can be classified into two i.e. value adding activities and non-value adding activities. The Activity Based Costing helps the management on focusing the forces on value adding activities and eliminate non-value adding activities.
4. The accurate allocation of costs to various products leads to proper pricing policy.
5.The management can take make or buy decisions by considering the cost of manufacture of a product or sub contract the same with an outside agency through Activity Based Costing analysis.
Disadvantage Of ABC.
1. Activity Based Costing is not useful to small companies.
2. If the overheads are relatively small, there is no use of Activity Based Costing.
3. Some companies are producing only one product or few products. If so, the Activity Based Costing cannot be applied.
4. Activity Based Costing method should not be used to prepare monthly profit statements.
Ans. (Amount In $) Statement showing gross margin per unit for each product under the traditional costing. Particular Poppy seed Blueberry Direct material per unit 0.75 0.85 Direct labor cost per unit 0.25 0.25 Prime cost per unit 1 1.1 Overhead cost Per unit 0.64 0.24 (working note 1) Total Cost per unit (1+0.64) 1.64 (1.10+0.24) 1.34 Sales Prise Per Unit 2.5 2.5 Margin Per Unit 0.86 1.16 (Amount In $) Statement showing gross margin per unit for each product under the ABC costing. Particular Poppy seed Blueberry Direct material per unit 0.75 0.85 Direct labor cost per unit 0.25 0.25 Prime cost per unit 1.00 1.10 Overhead cost Per unit as per ABC 0.42 0.40 (working note 2) Total Cost per unit (1+0.42) 1.42 (1.10+0.40) 1.50 Sales Prise Per Unit 2.50 2.50 Margin Per Unit 1.08 1.00 (Amount In $) Statement Showing Compare the gross margin of each product under the traditional system and ABC. Particular Poppy seed Blueberry Gross Margin as per traditional system 0.86 1.16 Gross Margin as per ABC 1.08 1 Difference In Gross Margin (0.86-1.08) -0.22 (1.16-1.00) 0.16 Working note - 1 Overhead cost per unit as per traditional Cost method (Amount In $) Poppy seed Blueberry overhead cost (allocated in machine hours 1500:750) (A) 90000 45000 No of Unit (B) 140000 190000 Overhead cost per unit (A)/(B) 0.64 0.24 working note -2 allocation of overhead as per cost Drivers (Amount In $) Total Cost Poppy seed Blueberry Set Up Cost 50000 20000 30000 (allocatited in no of setup 40:60) (50000/100*40) (50000/100*60) Quality Control 28300 4994.12 23305.88 (allocatited in no of inspection 75:350) (28300/425*75) (28300/425*350) Maintenance Cost 37800 25200 12600 (allocatited in no of machine hours (37800/2250*1500) (37800/2250*750) 1500:750) engineering cost 18900 9100 9800 (allocatited in no of Eng. Hours 65:70) (18900/135*65) (18900/135*70) Total Overhead Cost (A) 59294.12 75705.88 No Of Unit (B) 140000 190000 Overhead Cost Per Unit (A)/(B) 0.42 0.40Advantage of ABC.
1. Activity Based Costing helps to reduce costs by providing meaningful information on the opportunities available for reducing costs.
2. Activity Based Costing is working only on the activities. Hence, the management can take the quality decision by knowing the nature of each activity.
3. The activities can be classified into two i.e. value adding activities and non-value adding activities. The Activity Based Costing helps the management on focusing the forces on value adding activities and eliminate non-value adding activities.
4. The accurate allocation of costs to various products leads to proper pricing policy.
5.The management can take make or buy decisions by considering the cost of manufacture of a product or sub contract the same with an outside agency through Activity Based Costing analysis.
Disadvantage Of ABC.
1. Activity Based Costing is not useful to small companies.
2. If the overheads are relatively small, there is no use of Activity Based Costing.
3. Some companies are producing only one product or few products. If so, the Activity Based Costing cannot be applied.
4. Activity Based Costing method should not be used to prepare monthly profit statements.
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