You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic” and the “Superjet” which promises a jet power setting that “borders on cruel”. Since the introduction of the Superjet, the company’s profits have been faltering, despite increased sales. The company’s senior accountant believes that the costing system may be causing problems. The company uses direct-labour hours as the basis for applying overhead. Overhead is estimated to be $300,000. The following cost data is known: Basic Superjet Direct Materials $700 $1200 Direct Labour ($15 per hour) 60 90 Number of units produced 600 units 100 units The CFO wishes to explore an activity-based costing system Activity (Cost Driver) Estimated MOH Expected Activity Total Basic Superjet Assembly (Labour Hours) $60,000 3,000 2,400 600 Quality control (Inspection Hours) 75,000 800 600 200 Machining (Machine Hours) 25,000 40,000 30,000 10,000 Parts Admin (Number of Parts) 140,000 500 100 400 $300,000 Required - Provide detailed solutions/ answers to the following: a.) a) Under the traditional costing method: Compute the predetermined overhead rate. Determine the unit cost of each product. b.) b) Under activity based costing: Compute the activity rates for each activity. Determine the expected unit cost of each product. c.) c) Compare and comment on your answers from parts a.) and b.) above. d.) d) If ABC produces more accurate cost data, why is it not more widely used?
You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic” and the “Superjet” which promises a jet power setting that “borders on cruel”. Since the introduction of the Superjet, the company’s profits have been faltering, despite increased sales. The company’s senior accountant believes that the costing system may be causing problems. The company uses direct-labour hours as the basis for applying
The following cost data is known:
|
|
Basic |
Superjet |
|
Direct Materials |
$700 |
$1200 |
|
Direct Labour ($15 per hour) |
60 |
90 |
|
Number of units produced |
600 units |
100 units |
The CFO wishes to explore an activity-based costing system
|
Activity (Cost Driver) |
Estimated MOH |
Expected Activity |
|
|||
|
|
|
|
Total |
Basic |
Superjet |
|
|
Assembly (Labour Hours) |
$60,000 |
3,000 |
2,400 |
600 |
|
|
|
Quality control (Inspection Hours) |
75,000 |
800 |
600 |
200 |
|
|
|
Machining (Machine Hours) |
25,000 |
40,000 |
30,000 |
10,000 |
|
|
|
Parts Admin (Number of Parts) |
140,000 |
500 |
100 |
400 |
|
|
|
|
$300,000 |
|
|
|
||
|
|
|
|
|
|
|
|
Required - Provide detailed solutions/ answers to the following:
a.) a) Under the traditional costing method:
- Compute the predetermined overhead rate.
- Determine the unit cost of each product.
b.) b) Under activity based costing:
- Compute the activity rates for each activity.
- Determine the expected unit cost of each product.
c.) c) Compare and comment on your answers from parts a.) and b.) above.
d.) d) If ABC produces more accurate cost data, why is it not more widely used?
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