A firm makes a range of running shoes. There are three models – Short; Middle; and Long distance. The products are aimed at different segments of the market. Product costs are computed using an overhead rate based on the labour hour method. Selling prices are set on full cost plus 20%. A unit refers to a pair of running shoes. The following information is available: Short distance Middle distance Long distance Direct material cost per unit $25 $35 $40 Labour hours per unit 2 hrs 2 hrs 2 hrs Labour rate per hour $12 $12 $12 Total labour hours used 120,000 hrs 24,000 hrs 16,000 hrs Total number of units 60,000 units 12,000 units 8,000 units Cost driver information: Short distance Middle distance Long distance No. of machine hours 60,000 48,000 48,000 No. of material orders 30 100 200 No. of sales orders 12 48 63 The total overhead costs for the business amount to $1.2 million. The business is currently facing increased competition, especially from imported goods for the Short distance product. There does not seem to be the same amount of competition for the Middle and Long models. The Chief Executive has heard about the Cost Driver method of costing and asks for an analysis to be conducted. The overheads have been examined first and found to be able to be grouped into three basic activities: Machining $624,000 Materials ordering/storage $330,000 Distribution $246,000 Total overhead costs: $1,200,000 Required: Calculate for each product the full cost and selling price based on the firm’s original overhead allocation costing method using Labour Hour. Short distance Middle distance Long distance Full cost per unit: Selling Price per unit Calculate for each product the full cost and selling price based on the Cost Driver costing method. Short distance Middle distance Long distance Full cost per unit: Selling Price per unit Which products appear more expensive, and less expensive to produce, using the Cost Driver costing method? What implications are there for the firm’s operational and strategic decisions?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
A firm makes a range of running shoes. There are three models – Short; Middle; and Long distance. The products are aimed at different segments of the market. Product costs are computed using an overhead rate based on the labour hour method. Selling prices are set on full cost plus 20%. A unit refers to a pair of running shoes.
The following information is available:
|
|
Short distance |
Middle distance |
Long distance |
|
Direct material cost per unit |
$25 |
$35 |
$40 |
|
Labour hours per unit |
2 hrs |
2 hrs |
2 hrs |
|
Labour rate per hour |
$12 |
$12 |
$12 |
|
Total labour hours used |
120,000 hrs |
24,000 hrs |
16,000 hrs |
|
Total number of units |
60,000 units |
12,000 units |
8,000 units |
Cost driver information:
|
|
Short distance |
Middle distance |
Long distance |
|
No. of machine hours |
60,000 |
48,000 |
48,000 |
|
No. of material orders |
30 |
100 |
200 |
|
No. of sales orders |
12 |
48 |
63 |
The total overhead costs for the business amount to $1.2 million.
The business is currently facing increased competition, especially from imported goods for the Short distance product. There does not seem to be the same amount of competition for the Middle and Long models.
The Chief Executive has heard about the Cost Driver method of costing and asks for an analysis to be conducted.
The overheads have been examined first and found to be able to be grouped into three basic activities:
|
Machining |
$624,000 |
|
Materials ordering/storage |
$330,000 |
|
Distribution |
$246,000 |
|
Total overhead costs: |
$1,200,000 |
Required:
- Calculate for each product the full cost and selling price based on the firm’s original overhead allocation costing method using Labour Hour.
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Short distance |
Middle distance |
Long distance |
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Full cost per unit: |
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Selling Price per unit |
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- Calculate for each product the full cost and selling price based on the Cost Driver costing method.
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Short distance |
Middle distance |
Long distance |
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Full cost per unit: |
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Selling Price per unit |
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- Which products appear more expensive, and less expensive to produce, using the Cost Driver costing method? What implications are there for the firm’s operational and strategic decisions?
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