Ali's Kitchen company will manufacture three kitchen set products with three models, namely regular (REG), Advanced (ADV) and Gourmet (GMT). Previous work on a kitchen set used a job-order product-costing system, with manufacturing overhead charged based on direct-labor hours. The following data is a cost charging based on the traditional costing system: (on picture) The annual budget for overhead costs is $ 1,224,000, and the company determines a predetermined overhead rate of $ 12 per direct-labor hour. The costs of using the traditional costing system when using the kitchen set are as follows: (on picture) Ali's Kitchen's pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other equipment manufacturers, a REG unit is selling for $ 525, and an ADV unit is selling for $ 628. This price is somewhat below the company's target price. However, this result was partially offset by the bigger-than-expected gain in the GMT product line. Management has raised the price on the GMT model to $ 800, which is higher than the original target price. Even at these prices, Ali's Kitchen customers don't seem to hesitate to place an order. In addition, the company's competitors are not challenged in the market for the GMT product line. However, concerns are growing in Toledo about the difficulties in the REG and ADV markets. After all, this is a factory-based bread and butter product, with projected annual sales of 5,000 REG units and 4,000 ADV units. Ali's Kitchen's director of cost management, Rahmad, has been thinking for a long time about improving the product cost system at this factory. Rahmad wonders if the traditional, volume-based system provides accurate data management on product costs. He had read about activity-based costing, and wondered if ABC would be an upgrade to the factory product scoring system. After some discussion, an ABC proposal was made to top management of the company, and approval was obtained. The data collected for the new ABC system is shown in the following table. (on picture) 1. Show how the company's direct overhead rate of $ 12 per hour of work is computed. 2. Complete an activity-based cost analysis for Ali's Kitchen's three product lines. 3. Prepare a table, which calculates the cost of new products for each product line under ABC. 4. Prepare a table, which compares overhead costs, total product costs, and target prices for each product line under two alternative costing systems. 5. Are each of the three Kitchen King product lines over-cost or low-cost? What is the price per unit?
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.
Ali's Kitchen company will manufacture three kitchen set products with three models, namely regular (REG), Advanced (ADV) and Gourmet (GMT). Previous work on a kitchen set used a
The annual budget for overhead costs is $ 1,224,000, and the company determines a predetermined overhead rate of $ 12 per direct-labor hour. The costs of using the traditional costing system when using the kitchen set are as follows: (on picture)
Ali's Kitchen's pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other equipment manufacturers, a REG unit is selling for $ 525, and an ADV unit is selling for $ 628. This price is somewhat below the company's target price. However, this result was partially offset by the bigger-than-expected gain in the GMT product line. Management has raised the price on the GMT model to $ 800, which is higher than the original target price. Even at these prices, Ali's Kitchen customers don't seem to hesitate to place an order. In addition, the company's competitors are not challenged in the market for the GMT product line. However, concerns are growing in Toledo about the difficulties in the REG and ADV markets. After all, this is a factory-based bread and butter product, with projected annual sales of 5,000 REG units and 4,000 ADV units.
Ali's Kitchen's director of cost management, Rahmad, has been thinking for a long time about improving the product cost system at this factory. Rahmad wonders if the traditional, volume-based system provides accurate data management on product costs. He had read about activity-based costing, and wondered if ABC would be an upgrade to the factory product scoring system. After some discussion, an ABC proposal was made to top management of the company, and approval was obtained. The data collected for the new ABC system is shown in the following table. (on picture)
1. Show how the company's direct overhead rate of $ 12 per hour of work is computed.
2. Complete an activity-based cost analysis for Ali's Kitchen's three product lines.
3. Prepare a table, which calculates the cost of new products for each product line under ABC.
4. Prepare a table, which compares overhead costs, total product costs, and target prices for each product line under two alternative costing systems.
5. Are each of the three Kitchen King product lines over-cost or low-cost? What is the price per unit?
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