Chapter 5, Problem 19PSB

a

To determine

Calculate the cost per unit for each product.

Explanation of Solution

Calculation of overhead cost under ABC system:

Table (1)

Hence, the total allocated cost is $467,000.

Calculation of total allocated cost and cost per unit for Model W:

Table (2)

Calculation of total allocated cost and cost per unit for Model M:

Table (3)

Calculation of cost per unit consumption:

Table (4)

Hence, the costs per unit of Model W and Model M are $26.25 and $57.75.

Working notes:

Calculation of base for material handling:

$\begin{array}{c}\text{Base (materials handling)}=\text{Use of cost drive (Model W)}+\text{Use of cost drive (Model M)}\\ =700,000\text{ hours}+520,000\text{ hours}\\ =1,220,000\text{ hours}\end{array}$

Hence, the base for material handling is 1,220,000 hours.

…… (1)

Calculation of base for machine setup:

$\begin{array}{c}\text{Base (machine setups)}=\text{Use of cost drive (Model W)}+\text{Use of cost drive (Model M)}\\ =50\text{ setups}+40\text{ setups}\\ =90\text{ setups}\end{array}$

Hence, the base for machine setups is 90 setups.

…… (2)

Calculation of base for product testing:

$\begin{array}{c}\text{Base (product testing)}=\text{Use of cost drive (Model W)}+\text{Use of cost drive (Model M)}\\ =1,000\text{ units}+400\text{ units}\\ =1,400\text{ units}\end{array}$

Hence, the base product level is 1,400 units.

…… (3)

Calculation of depreciation:

$\begin{array}{c}\text{Base (depreciation)}=\text{Use of cost drive (Model W)}+\text{Use of cost drive (Model M)}\\ =3,200\text{ hours}+4,000\text{ hours}\\ =7,200\text{hours}\end{array}$

Hence, the base of depreciation is 2,500 hours.

…… (4)

b)

To determine

Calculate whether Company S earns a profit or loss for the next year.

Explanation of Solution

Calculation of profit or loss earned by the company previous month:

Table (5)

Hence, the company has a loss of -$25,000 on Model W and earns a profit of $162,000 on Model M.

c)

To determine

Calculate the target cost for each product and total target profit.

Explanation of Solution

Calculation of target cost:

Table (6)

Hence, the target costs of Model W and Model M are $21 and $63.75.

Calculation of total target profit:

Table (7)

Hence, the total target profit from both the models is $310,000.

Working notes:

Calculation of profit margin for the Model ZM:

$\begin{array}{c}\text{Profit margin (Model W)}=\text{Target price}\times 25\%\text{ (on target price)}\\ =\$25\times 25\%\\ =\$6.25\end{array}$

Hence, the profit margin for Model W is $6.25.

…… (5)

Calculation of profit margin for the Model M:

$\begin{array}{c}\text{Profit margin (Model M)}=\text{Target price}\times 25\%\text{ (on target price)}\\ =\$19.50\times 25\%\\ =\$58.50\end{array}$

Hence, the profit margin for Model M is $58.50.

…… (6)

d

To determine

Whether the new process allows Company S to attain its target cost

Explanation of Solution

Calculation of overhead cost under ABC system using new process:

Table (8)

Hence, the total allocated cost is $315,200.

Calculation of total allocated cost and cost per unit for Model W:

Table (9)

Calculation of total allocated cost and cost per unit for Model W:

Table (10)

Calculation of cost per unit consumption:

Table (11)

Hence, the costs per unit of Model W and Model M are $21.30and $51.15.

Company S will not achieve its target with a new process because the cost per unit of Model W is above the target cost.

Working notes:

Calculation of machine handling cost for a new process:

$\begin{array}{c}\text{Machine handling cost}=\left(\begin{array}{l}\text{Estimated Machine handling cost}-\\ \text{60\% on estimated machine handing cost}\end{array}\right)\\ =\$183,000-183,000\times 60\%\\ =\$183,000-109,800\\ =\$73,200\end{array}$

Hence, the machine handling data for a new process is $73,200.

…… (7)

Calculation of setup cost for new process:

$\begin{array}{c}\text{Setup cost}=\text{Cost per setup}\times \text{Total number of setups}\\ =\$1,000\text{ (Table 1)}\times \text{8}\\ =\$8,000\end{array}$

Hence, the setup cost for new process is $8,000.

Note:

The cost per setup is not affected.

…… (8)

Calculation of depreciation cost for new process:

$\begin{array}{c}\text{Depreciation cost}=\left(\begin{array}{l}\text{Estimated machine handling cost}+\\ \text{(New machine cost}÷\text{number of years)}\end{array}\right)\\ =\left(\$180,000+(200,000÷5)\right)\\ =(\$180,000+\$40,000)\\ =\$220,000\end{array}$

Hence, the depreciation cost for new process is $220,000.

…… (9)

Calculation of base for setup for a new process:

$\begin{array}{c}\text{Base (setups)}=4\text{ each setups}\times 2\text{ products}\\ =8\text{ setups}\end{array}$

Hence, the base for setup is 1,220,000 hours.

…… (10)

Calculation of base for machine hours for a new process:

$\begin{array}{c}\text{Base (machine hours)}=4,500\text{ (Model W)}+6,500\text{ (Model M)}\\ =11,000\text{ hours}\end{array}$

Hence, the base for machine hours is 11,000 hours.