TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows: Traditional Costing TRIX Direct Materials $700 Direct Labour ($20/hour) $120 Manufacturing overhead ($38 per DLH) $228 Total per unit cost $1, 048 In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI- X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare ananalysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019. Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Purchasing Number of orders $1,200,000 40,000 Machine setups Number of setups 900,000 18,000 Machining Machine hours 4,800,000 120,000 Quality Control Number of inspections 700,000 28,000 The cost drivers used: Cost Drivers TRI-X Product Purchase orders 17,000 Machine setups 5,000 Machine hours 75,000 Inspections 11,000 Required: 1. Calculate the activity rates for each of the overhead items using the four cost drivers. 2. Using the rates in (1) determine the unit cost for TRI-X. 3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
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.
TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:
|
Traditional Costing |
TRIX |
|
Direct Materials |
$700 |
|
Direct Labour ($20/hour) |
$120 |
|
Manufacturing |
$228 |
|
Total per unit cost |
$1, 048 |
In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI- X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics
|
Activity Cost Pools |
Cost Drivers |
Estimated Overhead |
Expected Use of Cost Drivers |
|
Purchasing |
Number of orders |
$1,200,000 |
40,000 |
|
Machine setups |
Number of setups |
900,000 |
18,000 |
|
Machining |
Machine hours |
4,800,000 |
120,000 |
|
Quality Control |
Number of inspections |
700,000 |
28,000 |
The cost drivers used:
|
Cost Drivers |
TRI-X Product |
|
Purchase orders |
17,000 |
|
Machine setups |
5,000 |
|
Machine hours |
75,000 |
|
Inspections |
11,000 |
Required:
1. Calculate the activity rates for each of the overhead items using the four cost drivers.
2. Using the rates in (1) determine the unit cost for TRI-X.
3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
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