Detailed explanation and steps
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Detailed explanation and steps
![DK manufactures three products, W, X and Y. Each product uses the same materials and
the same type of direct labour but in different quantities. The company currently uses a cost
plus basis to determine the selling price of its products. This is based on full cost using an
overhead absorption rate per direct labour hour. However, the managing director is
concerned that the company may be losing sales because of its approach to setting prices.
He thinks that a marginal costing approach may be more appropriate, particularly since the
workforce is guaranteed a minimum weekly wage and has a three month notice period.
Required:
a) Given the managing director's concern about DK's approach to setting selling prices,
discuss the advantages and disadvantages of marginal cost plus pricing AND total
cost-plus pricing.
The direct costs of the three products are shown below:
Product
Y
Budgeted annual production (units)
15,000
24,000
20,000
$ per unit
$ per unit
$ per unit
Direct materials
35
40
45
Direct labour ($10 per hour)
40
30
50
In addition to the above direct costs, DK incurs annual indirect production costs of
$1,044,000.
b) Calculate the full cost per unit of each product using DK's current method of
absorption
An analysis of the company's indirect production costs shows the following:
$
Cost driver
Material ordering costs
220,000
Number of supplier orders
Machine setup costs
100,000
Number of batches
Machine running costs
400,000
Number of machine hours
General facility costs
324,000
Number of machine hours
The following additional data relate to each product:
Product
W
Y
Machine hours per unit
4
8
Batch size (units)
500
400
1000
Supplier orders per batch
4
3
c) Calculate the full cost per unit of each product using activity-based costing and briefly
comment on the contrast
your results in part (b).
N 00](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc97d4ce1-7716-4e3e-ae05-b29cb2d5a551%2F1dab1f5b-7a3e-495c-88f6-f8f175c24b04%2F9wxg7r_processed.jpeg&w=3840&q=75)
Transcribed Image Text:DK manufactures three products, W, X and Y. Each product uses the same materials and
the same type of direct labour but in different quantities. The company currently uses a cost
plus basis to determine the selling price of its products. This is based on full cost using an
overhead absorption rate per direct labour hour. However, the managing director is
concerned that the company may be losing sales because of its approach to setting prices.
He thinks that a marginal costing approach may be more appropriate, particularly since the
workforce is guaranteed a minimum weekly wage and has a three month notice period.
Required:
a) Given the managing director's concern about DK's approach to setting selling prices,
discuss the advantages and disadvantages of marginal cost plus pricing AND total
cost-plus pricing.
The direct costs of the three products are shown below:
Product
Y
Budgeted annual production (units)
15,000
24,000
20,000
$ per unit
$ per unit
$ per unit
Direct materials
35
40
45
Direct labour ($10 per hour)
40
30
50
In addition to the above direct costs, DK incurs annual indirect production costs of
$1,044,000.
b) Calculate the full cost per unit of each product using DK's current method of
absorption
An analysis of the company's indirect production costs shows the following:
$
Cost driver
Material ordering costs
220,000
Number of supplier orders
Machine setup costs
100,000
Number of batches
Machine running costs
400,000
Number of machine hours
General facility costs
324,000
Number of machine hours
The following additional data relate to each product:
Product
W
Y
Machine hours per unit
4
8
Batch size (units)
500
400
1000
Supplier orders per batch
4
3
c) Calculate the full cost per unit of each product using activity-based costing and briefly
comment on the contrast
your results in part (b).
N 00
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