Concept explainers
Treat Dog Collars uses activity-based costing. Treat’s system has the following features:
Each collar has three parts, direct materials cost is $5.00 per collar, and direct labor cost is $4.00 per collar. Suppose Animal Hut has asked for a bid on 30,000 dog collars. Treat will issue a total of 175 purchase orders if Animal Hut accepts Treat’s bid.
Requirements
- 1. Compute the total estimated cost Treat will incur to purchase the needed materials and then assemble and package 30,000 dog collars. Also compute the cost per collar.
- 2. For bidding, Treat adds a 40% markup to total cost. What total price will the company bid for the entire Animal Hut order?
- 3. Suppose that instead of an ABC system, Treat has a traditional product costing system that allocates indirect costs at the rate of $9.50 per direct labor hour. The dog collar order will require 9,000 direct labor hours. What total price will Treat bid using this system’s total cost?
- 4. Use your answers to Requirements 2 and 3 to explain how ABC can help Treat make a better decision about the bid price it will offer Animal Hut.
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Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)
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