Concept explainers
Videos
Consider the following date for two products of Gitano Manufacturing.
| Product A | Product B | ||
| Number of units produced…………………. | 10,000 units | 2,000 units | |
| Direct labor cost (@$24 per DLH)……………….. | 0.20 DLH per unit | 0.25 DLH per unit | |
| Direct materials cost… | $2 per unit | $3 per unit | |
| Activity | |||
| Machine setup…………. | $121,000 | ||
| Materials handling….. | 48,000 | ||
| Quality control inspections………. | 80,000 | ||
| $249,000 |
Required
- Using direct labor hours as the basis for assigning overhead costs, determine the total production cost per unit for each product line.
- If the market price for Product A is $20 and the market price for Product B is $60, determine the profit or loss per unit for each product. Comment on the results.
- Consider the following additional information about these two product lines. If ABC is used for assigning overhead costs to products, what is the cost per unit for Product A and for Product B?
| Product A | Product B | |
| Number of setups required for production…………….. | 10 setups | 12 setups |
| Number of parts required……. | 1 part/ unit | 3 part/unit |
| Inspection hours required | 40 hours | 210 hours |
- Determine the profit or loss per unit for each product. Should this information influence company strategy? Explain.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 1:
The total per unit production cost of given product lines using direct labor hours as the basis for allocating overhead costs.
Answer to Problem 10E
Per unit total product cost for Product A is $ 26.72 and of product B is $ 33.90
Explanation of Solution
| Product A | Product B | Total | |
| Total Direct material cost (a) | $26, 000 | ||
| Total Labor hours | 2, 500 hours | ||
| Total Labor cost (b) | $60, 000 | ||
| Total overhead cost (c ) | 249, 000 | ||
| Total production cost (a+b+c) | 267, 200 | 67, 800 | $335, 000 |
| Number of units (d) | 10, 000 | 2, 000 | 16, 000 |
| Per unit total production cost | $26.72 | $33.90 |
Thus, per unit cost of each product using direct labor hours as the basis of overhead allocation have been computed.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 2:
To compute:
The profit or loss on sale of the given two products.
Answer to Problem 10E
The loss on sale of Product A is $ 6.72 per unit and profit on sale of product B is $26.10 per unit.
As, the overheads have been allocated based on direct labor hours and product A has major production units 10, 000 units as compared to 2, 000 units of Product B, so more overheads have been allocated to Product A than product B. Product A uses less direct labor hours per unit 0.20 DLH as compared to 0.25 DLH of product
Explanation of Solution
| Product A | Product B | |
| Sale Price per unit | $20 | $60 |
| Less. Total cost of production per unit | $26.72 | $33.90 |
| Profit /(Loss) per unit | $(6.72) | $26.10 |
Thus, the profit or loss per unit on the sale of both the products has been computed.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 3:
The unit cost of the given products using ABC method for overhead cost allocation.
Answer to Problem 10E
Per unit total product cost for Product A is $16.58 and of product B is $ 84.60
Explanation of Solution
Overhead cost allocation using ABC
| Product A | Product B | Total | |
| Machine Set up | $55, 000 | $66, 000 | $121, 000 |
| Materials handling | $30, 000 | $18, 000 | $48, 000 |
| Quality control inspection | $12, 800 | $67, 200 | $80, 000 |
| Total overhead cost | $97, 800 | $151, 200 | $249, 000 |
| Overhead cost per unit | 9.78 | $75.6 |
Machine set up cost has been allocated based on number of setups required for production. Total setup numbers = 10+12=22
So, total machine set up cost of Product A = $121, 000/22*10=$55, 000
So, total machine set up cost of Product B = $121, 000/22*12=$66, 000
Materials handling cost has been allocated based on number of parts required for production. Total numbers of parts required = 10, 000+6, 000=16, 000
So, total machine set up cost of Product A = $48, 000/16, 000*10, 000=$30, 000
So, total machine set up cost of Product B = $48, 000/16, 000*6, 000=$18, 000
Quality control inspection cost has been allocated based on number of inspection hours required. Total numbers of parts required = 40+210=250
So, total machine set up cost of Product A = $80, 000/250*40=$12, 800
So, total machine set up cost of Product B = $80, 000/250*210=$67, 200
Computation of per unit total cost
| Product A per unit | Product B | |
| Direct material cost (a) | $2 | $3 |
| Total Labor cost (b) | ||
| Total per unit overhead cost (c ) | $9.78 | $75.6 |
| Total per unit production cost (a+b+c) | $16.58 | $84.6 |
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 4:
The profit or loss on sale of the given two products and the company strategy in view of the profit or loss.
Answer to Problem 10E
The profit on sale of Product A is $ 3.42 per unit and loss on sale of product B is $24.60 per unit.
Since, the company is incurring loss on sale of Product B, it should consider increasing the sale price of the product B to prevent losses and have profits.
Explanation of Solution
| Product A | Product B | |
| Sale Price per unit | $20 | $60 |
| Less. Total cost of production per unit | $16.58 | $84.60 |
| Profit /(Loss) per unit | $3.42 | ($24.60) |
Want to see more full solutions like this?
Chapter 4 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- Computing Return on Equity In a recent year, Adobe Inc. reports net income of $4,756 million. Its stockholders’ equity is $14,051 million and $14,797 million at the start and end of the fiscal year, respectively. a. Compute its return on equity (ROE) for the year. Round answers to the nearest whole dollar amount. Numerator Denominator Result Return on equity Answer 1 Answer 2 b. Adobe repurchased $6,550 million of its common stock during the year. Did this repurchase increase or decrease ROE? NOTE: Assume there was no change in net income related to the stock repurchase. Answer 3 c. If Adobe had not repurchased common stock during the year, what would ROE have been? Note: Enter answer as a percentage rounded to the nearest one decimal place (ex: 24.8%). Answer 4%arrow_forwardVal Sims is a self-employed CPA and is the sole practitioner in her tax practice. She has had several situations arise this year involving client representation, client records, and client fee arrangements. Val is concerned that her actions may be in violation of the Circular 230 regulations governing practice before the Internal Revenue Service (IRS). Indicate whether Val is in violation of the regulations for each of the actions described. 1. Andrews, a current business client, is being audited by the IRS. The IRS auditor in charge of the audit has requested that Val provide the depreciation schedules that Val prepared for Andrews's sole proprietorship business. Andrews has refused to provide his copies of the depreciation schedules and has instructed Val not to provide the documents to the auditor. The depreciation schedules are not privileged information. Val provided the requested information to the IRS agent against her client's instructions. 2. In the IRS audit of Val's client…arrow_forwardVal Sims is a self-employed CPA and is the sole practitioner in her tax practice. She has had several situations arise this year involving client representation, client records, and client fee arrangements. Val is concerned that her actions may be in violation of the Circular 230 regulations governing practice before the Internal Revenue Service (IRS). Indicate whether Val is in violation of the regulations for each of the actions described. 1. Val has prepared tax returns and provided tax advice for Charles and Diane, a married couple, for several years. This year, Diane informed her that she and Charles are getting a divorce and asked Val for specific advice as to how she should negotiate an advantageous marital property settlement. Because the divorce was still pending at the end of the year, she also asked Val to prepare their joint income tax return for the year. Val informed Diane that there was a potential conflict of interest and Diane gave informed consent in writing. Val did…arrow_forward
- Applying the Accounting Equation and Computing Financing ProportionsUse the accounting equation to compute the missing financial amounts (a), (b), and (c). $ millions Assets = Liabilities + Equity Hewlett-Packard $106,882 = $78,731 + $ (a) General Mills $21,712 = $ (b) + $5,307 Target $ (c) = $27,305 + $12,957 a. Equity: $Answer 1 b. Liabilities: $Answer 2 c. Assets: $Answer 3 Determine the percentage of owner-financing for each company. Company Numerator Denominator % Owner-financed Hewlett-Packard Answer 4 Answer 5 General Mills Answer 6 Answer 7 Target Answer 8 Answer 9 Which of these companies is the most owner-financed? Answer 10Which of these companies is the most nonowner-financed? Answer 11arrow_forwardReading and Interpreting Audit OpinionsRivian Automotive financial statements include the following audit report from KPMG LLP. -----------------------------------------------------------------------------------------------------------------------------------------------Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of DirectorsRivian Automotive, Inc.:Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Rivian Automotive, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in contingently redeemable convertible preferred stock and stockholders' (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in…arrow_forwardIn a recent year, Adobe Inc. reports net income of $4,756 million. Its stockholders’ equity is $14,051 million and $14,797 million at the start and end of the fiscal year, respectively. a. Compute its return on equity (ROE) for the year. Round answers to the nearest whole dollar amount. Numerator Denominator Result Return on equity Answer 1 Answer 2 b. Adobe repurchased $6,550 million of its common stock during the year. Did this repurchase increase or decrease ROE? NOTE: Assume there was no change in net income related to the stock repurchase. c. If Adobe had not repurchased common stock during the year, what would ROE have been? Note: Enter answer as a percentage rounded to the nearest one decimal place (ex: 24.8%).arrow_forward
- Computing Return on Assets and Applying the Accounting Equation Nordstrom Inc. reports net income of $564 million for a recent fiscal year. At the beginning of that fiscal year, Nordstrom had $8,115 million in total assets. By fiscal year end, total assets had decreased to $7,886 million. What is Nordstrom’s ROA? Note: Enter answer as a percentage rounded to the nearest 2 decimal places (ex: 24.58%). ROA Answerarrow_forwardComputing and Interpreting Financial Statement RatiosFollowing are selected ratios of Norfolk Southern. Return on Assets (ROA) Component FY4 FY3 Profitability (Net income/Sales) 25.7% 27.0% Productivity (Sales/Average assets) 0.329 0.291 a. Was the company profitable in FY4? Answer 1b. In which year was the company more profitable? Answer 2c. Is the change in productivity a positive or negative development? Answer 3d. Compute the company’s ROA for both years. Note: Enter your answer as a percentage rounded to one decimal place (Ex: 29.4%).FY4 Answer 4%FY3 Answer 5%e. From the information, which of the following best explains the change in ROA during FY4?arrow_forwardExpand upon it and add to itarrow_forward
- Define these terms: A) Information Asymmetry. B) Material misstatement in the audited financial statements. C) The term "Professional Skepticism." D) Contribution margin ratio. E) Gross Margin, also known as Gross Profit Margin.arrow_forwardNo Ai Which of the following errors will cause the trial balance to not balance?A. Omission of a transactionB. Entry posted twiceC. Transposing digits in one sideD. Debiting one account and crediting anotherarrow_forwardDon't use ChatGPT!! Which of the following errors will cause the trial balance to not balance?A. Omission of a transactionB. Entry posted twiceC. Transposing digits in one sideD. Debiting one account and crediting anotherarrow_forward
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College