mit Manufacturing Company produces k molded from plastic and designed to per- RO
ID: 2517924 • Letter: M
Question
mit Manufacturing Company produces k molded from plastic and designed to per- ROBLEM 6-11/Activity-Based Costing [LO 2] The Sum two products. One is a recreational whitewater kaya form as a durable whitewater play boat. The other product is a high-performance competition kayak molded with high-tech fiberglass materials that are very light. The recreation kayak is uni- form in its dimensions and style. However, the competition kayak is custom designed to fit the individual (e.g., rocker and cockpit size are adjusted). Most of the sales come from the recreation kayaks, but recently sales of the competition kayaks have been increasing. The following information is related to the products for the most recent yearExplanation / Answer
a. Assignment of overhead 83% to recreational kayaks while following the traditional method of cost allocation may not be a good idea as it may not give a clear picture of product costs because the application of overhead burden rates is arbitrary and applied equally to the cost of all products. It does not give a clear picture as to activities are used by the particular products.
b. Summit might be able to allocate the cost effectively by using activity based costing as it will give the company a clear picture, most accurate and identify the areas where the expenses are incurred on unprofitable products.
Summit has to ensure that all the activities carried out in the organisation are identified the cost related to those activities are accurate and the number of products using those activites can be related.
c. To determine the overhead allocation to both the products follow the below process :
d. We can see the rate difference between the traditional costing and ABC system. The allocation has clearly changed instead of using a blanket rate for the whole company. We can see that after allocation of the fixed cost.
Profit of each product Recreational Kayaks = Selling price - Variable cost - fixed cost = 650 - 175 - 148.75 = 326.25
Competition Kayaks = 800 - 275 - 306.25 = 218.75
We can clearly see that Recreational Kayaks is profitable for the company. Therefore usage of ABC system helps to identify proper cost allocation and more profitable products
Cost Pool Amount Cost Driver Cost Ratio Recreational Kayaks Competional Kayaks Building Depreciation $35,000 Square Footage 8:2 28,000 7,000 Equipment $35,000 Machine Hours 4250:750 29,750 5250 Materials Ordering $25,000 Number of orders 2:1 16,666.667 8,333.334 Quality Control $20,000 Number of inspections 300:150 13,333.334 6,666.667 Maintenance and Security $20,000 Square footage 8:2 16,000 4,000 Setup and drafting $35,000 Number of setup 30:60 11,666.667 23,333.334 Supervision $40,000 Direct labour cost 5:1 33,333.334 6,666.667 Total Cost $210,000 $148750 $61,250 Hours 1000 200 Rate 148.75 306.25Related Questions
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