Carter Inc manufactures two products: normal and deluxe. fi in two steps. In the

Question

Carter Inc manufactures two products: normal and deluxe. fi in two steps. In the first step all the indirect costs of the two p using machine hours. In a second step the direct labour hours are used to assign product. In 2010 budgeted US$1,000,000 for the total operational indir production departments A and B are assigned the indirect costs to each rm uses a roduction departments A an n direct costs of thete. The firm uses a traditional cost distribution system ect costs. Production Department 4,000 20,000 o 16,000 10,000 Machine hours Direct labour hours The following information refers to the operations of the firm in January 2010. Normal Units produced and sold Direct materials unit cost Direct labour rate, Hr Direct labour hours-Dept A per unit Direct labour hours-Dept B per unit Deluxe 200 $100 $25 2 1 $50 $20 Carter Inc is considering the possibility of using an activity based cost system. The controller prepared the following information for a preliminary analysis Cost driver consumption Budgeted indirect costs Budgeted Activity Cost driver volume Deluxe Normal Material movement Machine preparation Inspections | 7,000 | # production 350 15 20 batches 400,000 | #of 588,000 | # of units 5,000 | #of 500 25 50 preparations 19,600 250 2001 50 800 100 Delivery deliveries 1,000,000 Calculate the cost per unit for each product under both costing systems.

Explanation / Answer

Indirect Cost 1000000 Total Direct Labor Hour (20000+10000) 30000 Indirect cost application Rate =100000/30000 33.33 Per DLH Cost Per Unit Under Traditional Costing System Deluxe Normal Direct Material 100 50 Direct Labor Cost 3 hr Per Unit * Direct Labor Rate 75 60 Indirect Cost 3 hr Per Unit * 33.33 100 100 Cost Per Unit Under Traditional Costing System 275 210 ABC costing Cost Budgeted Volume Activity Rate Material Movement 7000 350 20 Machine Preparation 400000 500 800 Inspection 588000 19600 30 Delivery 5000 250 20 1000000 Deluxe Normal Material Movement @20 300 400 Machine Preparation @800 20000 40000 Inspection @30 6000 24000 Delivery @20 1000 2000 Total Overhead Cost 27300 66400 No of units produced 200 800 Indirect cost per Unit 136.50 83.00 Deluxe Normal Direct Material 100 50 Direct Labor Cost 3 hr Per Unit * Direct Labor Rate 75 100 Indirect Cost 136.50 83.00 Cost Per Unit Under ABC Costing System 311.5 233

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