Management Accounting Assignment

The Genre company is the manufacturer of  two products the Basic and the Advanced .Details of production data and product cost data are as follows:

                                             Basic               Advanced
Direct material                         40                  60
Direct labour                           2 hours           3 hours
Manufacturing overhead           2 hours           3 hours
Direct labour cost per hour       $15 per hour   $15 per hour
Production                              2000 units       10000 units

Manufacturing overhead has traditionally used  direct labour hours to calculate the predetermined  overhead  rate.

The Manufacturing overhead budget is as follows:

Set up costs                     $360,000
Engineering costs              180,000
Machine related costs         900,000
Plant related costs             192,000
Total                                $1,632,000

The Genre company has traditionally priced its products at  120 per cent of manufacturing cost .

Recently the Genre company has found it has had difficulty selling its advanced product with a competitor entering the market from overseas and making substantial sales at a price considerably below Genre's price for the Advanced product .

The CEO of Genre ,Jane Monk, cannot understand  how this could be and has asked you to investigate the matter.You start to examine some of the data and decide  to check out a new approach to allocate costs called Activity Based Costing .You have managed to identify the following information:

Activity Cost Pool          Cost Driver                           Budgeted level of Cost Driver
Set up costs                 Number of production runs    80 runs
Engineering costs          Engineering changes             200 engineering changes
Machine related costs     Machine hours                      18,000 hours
Plant related costs         Floor space in sq ft               3,840 sq ft

In addition the following information has been determined :

--The Basic product is manufactured in production runs of 50 units each and the Advanced product is manufactured in 250 unit batches

--75% of the engineering changes are used by the Basic product with the remaining 25% used by the Advanced product

--Each Basic product requires 4 machine hours whereas each Advanced product requires 1 machine hour

--The plant has 3,840 square feet of floor space with 80% of it used in the production of the Basic product

Required:

Using the information above and your knowledge of Activity Based  Costing you are required to provide answers to the following:

(a) Calculate the predetermined overhead rate that would be used under traditional overhead costing.

(b) Calculate the product cost per unit for the Basic and Advanced products under traditional costing.

(c) Calculate the price that would be charged  for the Basic and the Advanced products under traditional costing.

(d) Calculate the cost per Activity for each cost pool.

(e) Calculate the cost per unit for Basic and Advanced  products using Activity Based Costing.

(f) Based on your calculations with respect to Basic and Advanced products comment upon whether either product has been overcosted or undercosted.

(g) Discuss the benefits that can be obtained from using an Activity Based Costing system and whether it would be useful in costing the current products.