
Concept explainers
Introduction:
Activity-based costing: The accounting method where the
Requiremnet-1a:
To Compute:
The overhead cost per unit for each product line using the activity based costing.

Answer to Problem 2E
Solution: The overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.
Explanation of Solution
Activity | A. Overhead Costs | B. Expected Activity | C. Activity Rate (A/B) | Model 145 | Model 212 | ||||
D1. Activity driver incurred | E1. Overhead assigned=C*D1 | D2. Activity driver incurred | E2. Overhead assigned=C*D2 | ||||||
Components | ($) | ($) | ($) | ($) | |||||
Changeover | 500,000 | 800 | Number of batches | 625.00 | per batch | 400 | 250,000 | 400 | 250,000 |
Machining | 279,000 | 6,000 | Machine hours | 46.50 | per machine hours | 1,800 | 83,700 | 4,200 | 195,300 |
Setups | 225,000 | 120 | Setups | 1,875.00 | per setup | 60 | 112,500 | 60 | 112,500 |
Finishing | |||||||||
Welding | 180,300 | 3,000 | Welding hours | 60.10 | per welding hour | 800 | 48,080 | 2,200 | 132,220 |
Inspecting | 210,000 | 700 | Number of inspections | 300.00 | per inspection | 400 | 120,000 | 300 | 90,000 |
Rework | 75,000 | 300 | Rework orders | 250.00 | per rework order | 160 | 40,000 | 140 | 35,000 |
Support | |||||||||
Purchasing | 135,000 | 450 | Purchase orders | 300.00 | per purchase order | 300 | 90,000 | 150 | 45,000 |
Providing Space | 32,000 | 5,000 | Number of units produced | 6.40 | per unit | 1,500 | 9,600 | 3,500 | 22,400 |
Providing Utilities | 65,000 | 5,000 | Number of units produced | 13.00 | per unit | 1,500 | 19,500 | 3,500 | 45,500 |
Total overhead cost | 773,380 | 927,920 | |||||||
Total units produced | 1,500 | 3,500 | |||||||
Overhead cost per unit | 515.59 | 265.12 |
The formula for calculating overhead cost per unit using activity based costing is:
Thus using the above formula, the overhead cost per unit for both the models are calculated as below:
Model 145:
Total overhead cost [As calculated in the table] is: $773,380
Number of units produced: $1,500
Overhead cost per unit for Model 145:
Model 212:
Total overhead cost [As calculated in the table] is: $927,920
Number of units produced: $3,500
Overhead cost per unit for Model 212:
Hence the overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.
Requirement-2:
To determine:
The total cost per unit for each product line if the direct labour and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.

Answer to Problem 2E
Solution:
Model 145:
Model 212:
Explanation of Solution
The formula for computing total cost per unit is:
Hence using the above formula the total cost per unit for each model is computed as below:
Model 145:
Given,
Direct Material and labour costs per unit: $250
Overhead Cost for Model 145 (As calculated in Requirement-1): $515.59
Total costs per unit for Model 145:
Model 212:
Given,
Direct Material and labour costs per unit: $180
Overhead rate for Model 212 (As calculated in Requirement-1): $265.12
Total costs per unit for Model 212:
Hence the total cost per unit for Model 145 is $765.59 and Model 212 is $445.12.
Requirement-3a:
To determine:
The profit or loss per unit for each model when the market price is $800 for Model 145 and $470 for Model 212

Answer to Problem 2E
Solution:
Model 145:
Profit/Loss per unit: $800-$765.59
Profit= $34.41
Model 212:
Profit/Loss per unit: $470-$445.12
Profit=$24.88
Explanation of Solution
The formula for determining profit or loss per unit is:
Hence the profit or loss for each model is determined using the formula as below:
Model 145:
Market Price per unit: $800
Costs per unit: $765.59
Profit/Loss per unit: $800-$765.59
Profit=$34.41
Model 212:
Market Price per unit: $470
Costs per unit: $445.12
Profit/Loss per unit: $470-$445.12
Profit: $24.88
Hence the Model 145 contributes to the profit of $34.41 and Model 212 has the profit of $24.88.
Requirement-3b:
To discuss:
The results of profit for both the models when the market price is $800 for Model 145 and $470 for the Model 212

Answer to Problem 2E
Solution:
The profit contributed by Model 145 of $34.41 is greater than the profit of $24.88 contributed by Model 212 which means that Model 145 ensures the competitive success of the business compared to the Model 212. Therefore either the market price of the Model 212 should be increased or the total costs per unit of the model should be reduced if the Model 212 expects to earn a higher profit.
Explanation of Solution
Both Model 145 and Model 212 of air conditioners contribute to the profit of the Real Cool Company. However the Model 145 contributes to the higher profit of $34.41 when compared to Model 212 that contributes only to $24.88.
The production profit significantly matters to the company to continue the proposal in the long run. Hence in the given scenario, manufacturer should chose the manufacturing model that contributes to the higher profit of the company.
Hence the Model 145 of Real Cool manufacturers contribute to the higher profit making the production more profitable compared to the profit generated by the Model 212. Thus the Model 145 ensures for the competitive success of the business and its survival in the long run in the given scenario.
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Fundamental Accounting Principles -Hardcover
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