Activity-Based Costing The president of H&Y Company has been concerned about the

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Activity-Based Costing The president of H&Y Company has been concerned about the profitability of the company product lines. First, she wants you to examine the current situation using traditional approach of allocating overhead. Second, she wants you to apply Activity-Based costing to develop a new product cost for each product line.  Third, she wants your opinion about the best approach to use to determine the products' unit cost. 1. The expected level of sales is 200 of each product. Product A selling price: $11,000 Product B selling price: $20,000 2. Direct Material cost per unit Product A $6,700 Direct Material cost per unit Product B $12,600 3. Direct Labor cost per unit Product A $380 Direct Labor cost per unit Product B $2,000 4. Factory Overhead Activities: a. Every product is inspected. b. Product A moving parts oiled: 5 parts per product Product B moving parts oiled: 3 parts per product c. Material is delivered to each of the product lines on a daily basis. Product A 5 times per week Product B 5 times per week d. Product A redesign: 5 hours per week Product B redesign: 20 hours per week e. Product A supplier purchase orders: 5 times per week Product B supplier purchase orders: 2 times per month f. Facility administration is based on direct labor costs. Total Estimated Activity Cost Activity Cost Driver Estimated Cost Inspection # units $190,000 Lubricating oil # oil applications $80,000 Material handling # deliveries $100,000 Product design # redesign hours $456,000 Purchase orders # purchase orders $90,000 Facility Administration direct labor cost ($) $36,000      Total factory overhead $952,000 Activity-Based Costing The president of H&Y Company has been concerned about the profitability of the company product lines. First, she wants you to examine the current situation using traditional approach of allocating overhead. Second, she wants you to apply Activity-Based costing to develop a new product cost for each product line.  Third, she wants your opinion about the best approach to use to determine the products' unit cost. 1. The expected level of sales is 200 of each product. Product A selling price: $11,000 Product B selling price: $20,000 2. Direct Material cost per unit Product A $6,700 Direct Material cost per unit Product B $12,600 3. Direct Labor cost per unit Product A $380 Direct Labor cost per unit Product B $2,000 4. Factory Overhead Activities: a. Every product is inspected. b. Product A moving parts oiled: 5 parts per product Product B moving parts oiled: 3 parts per product c. Material is delivered to each of the product lines on a daily basis. Product A 5 times per week Product B 5 times per week d. Product A redesign: 5 hours per week Product B redesign: 20 hours per week e. Product A supplier purchase orders: 5 times per week Product B supplier purchase orders: 2 times per month f. Facility administration is based on direct labor costs. Total Estimated Activity Cost Activity Cost Driver Estimated Cost Inspection # units $190,000 Lubricating oil # oil applications $80,000 Material handling # deliveries $100,000 Product design # redesign hours $456,000 Purchase orders # purchase orders $90,000 Facility Administration direct labor cost ($) $36,000      Total factory overhead $952,000

Explanation / Answer

1.Allocation of overheads based on traditional based costing.

sales(200*11000)(200*20000) (1) 2200000 4000000

A B Direct material (200*6700) 1340000

(200*12600) 2520000

Direct Labour cost (200*380) 76000

(200*2000) 400000

Factory Overheards(based on every

product is inspected)

950000*200units/400units 425000

950000*200units/400units 425000

-------------- -------------

total cost under traditional based costing( 2) 1841000 3345000

profitabiliy (1-2) 359000 665000

----------------- ----------------

B profitability under ABC

A B

Material cost 1340000 2520000

direct labour 76000 400000

. factory overherads

inspection 190000/200 95000 95000

lubricating oil 80000*5/8, 80000*3/8 50000 30000

material handling 100000*5/10, 100000*5/10 50000 50000

product design 456000*5/25, 456000*20/25 91200 364800

Purchase orders 90000*5/5.5, 90000*0.5/5.5 81818 8181

facilitating admistration 36000*360/2360, 36000*2000/2360 5492 30509

------------- ------------

1789510 3498490

less sales 2200000 4400000

profitability 401490 501510

the best approach for A is ABC

for B is traditional approach

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