Ashley Co manufactures three products, A, B and C. Demand for products A and B is relatively elastic whilst demand for product C is relatively inelastic. Each product uses the same materials and the same type of direct labor but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labor hours. Šelling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up. Budgeted production and sales volumes for A, B and C for the next year are 30,000 units, 24,000 units and 33,000 units respectively. The budgeted direct costs of the three products are shown below: Direct Material per unit $50 $56 $44 Product Direct labor ($24 per hour) per unit $60 $72 $48 A В C The following additional data relate to each product: Product A. B C Batch size (units) No of purchase orders per batch | Machine hours per unit 4 5 4 500 1.5 1.25 800 400 1.4 In the next year, Ashley Co also expects to incur indirect production costs of $1,377,400, which are analysed as follows: Cost pools | Machine set up costs Material ordering costs Machine running costs General facility costs Cost amount Cost drivers $560,000 Number of batches $632,000 Number of purchase orders $840,000 Number of machine hours $722.800 Number of machine hours $2,754,800 Ashley Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged. Required:
Ashley Co manufactures three products, A, B and C. Demand for products A and B is relatively elastic whilst demand for product C is relatively inelastic. Each product uses the same materials and the same type of direct labor but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labor hours. Šelling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up. Budgeted production and sales volumes for A, B and C for the next year are 30,000 units, 24,000 units and 33,000 units respectively. The budgeted direct costs of the three products are shown below: Direct Material per unit $50 $56 $44 Product Direct labor ($24 per hour) per unit $60 $72 $48 A В C The following additional data relate to each product: Product A. B C Batch size (units) No of purchase orders per batch | Machine hours per unit 4 5 4 500 1.5 1.25 800 400 1.4 In the next year, Ashley Co also expects to incur indirect production costs of $1,377,400, which are analysed as follows: Cost pools | Machine set up costs Material ordering costs Machine running costs General facility costs Cost amount Cost drivers $560,000 Number of batches $632,000 Number of purchase orders $840,000 Number of machine hours $722.800 Number of machine hours $2,754,800 Ashley Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged. Required:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
A. Calculate the budgeted full production cost per unit of each product using Ashley Co’s current method of absorption costing.
B. Calculate the budgeted full production cost per unit of each product using activity-based costing.
Transcribed Image Text:Ashley Co manufactures three products, A, B and C. Demand for products A and B is relatively elastic
whilst demand for product C is relatively inelastic. Each product uses the same materials and the same
type of direct labor but in different quantities. For many years, the company has been using full
absorption costing and absorbing overheads on the basis of direct labor hours. Selling prices are then
determined using cost plus pricing. This is common within this industry, with most competitors
applying a standard mark-up.
Budgeted production and sales volumes for A, B and C for the next year are 30,000 units, 24,000
units and 33,000 units respectively. The budgeted direct costs of the three products are shown below:
Direct Material
Direct labor ($24 per hour)
per unit
Product
per unit
A
$50
$56
$60
В
$72
$44
$48
The following additional data relate to each product:
Product
Batch size (units) No of purchase orders per batch
Machine hours per unit
A
500
4
1.5
В
800
5
1.25
400
4
1.4
In the next year, Ashley Co also expects to incur indirect production costs of $1,377,400, which are
analysed as follows:
Cost pools
Machine set up costs
Material ordering costs
Machine running costs
General facility costs
Cost drivers
Cost amount
$560,000 Number of batches
$632,000 Number of purchase orders
$840,000 Number of machine hours
$722.800 Number of machine hours
$2,754,800
Ashley Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited
because of its use of cost plus pricing and the application of the standard mark-up. The finance
director has suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be charged.
Required:
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