Questions:
A computer manufacturer produces three types of devices: mobile phones, tablets, and computers. For the production of these three devices you have the following information:
Phone |
Tablet |
Computer |
||
Material cost per unit |
£90 |
£140 |
£315 |
|
Direct labor hours per unit |
2 |
2.5 |
4 |
|
Budgeted units |
1,500,000 |
900,000 |
1,200,000 |
|
Labor cost per hour |
£8 |
|||
Overhead costs per annum |
||||
Utilities |
£20,000,000 |
|||
Rent |
£15,000,000 |
|||
Audit and legal |
£5,000,000 |
|||
Administrative staff |
£40,000,000 |
|||
Total |
£80,000,000 |
ABC analysis suggested that overhead costs are distributed to the three products according to the table below:
Overheads |
Phone |
Tablet |
Computer |
Utilities |
£8,000,000 |
£5,000,000 |
£7,000,000 |
Rent |
£8,250,000 |
£2,250,000 |
£4,500,000 |
Audit and legal |
£2,900,000 |
£1,250,000 |
£850,000 |
Administrative staff |
£23,200,000 |
£6,000,000 |
£10,800,000 |
For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be:
Phone |
Tablet |
Computer |
|
Full costing price |
£170.69 |
£233.87 |
£435.67 |
1. Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours.
2. Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system.
3. Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company.
1. The following is the required solution:
Budgeted units |
1500000 |
900000 |
1200000 |
|
(Amounts in £) |
||||
Particulars |
Phone |
Tablet |
Computer |
|
Direct material |
1350,00,000.00 |
1260,00,000.00 |
3780,00,000.00 |
|
Direct labour |
240,00,000.00 |
180,00,000.00 |
384,00,000.00 |
|
Overheads |
238,80,597.01 |
179,10,447.76 |
382,08,955.22 |
800,00,000.00 |
in |
30,00,000.00 |
22,50,000.00 |
48,00,000.00 |
100,50,000.00 |
Total cost |
1828,80,597.01 |
1619,10,447.76 |
4546,08,955.22 |
|
divided by the number of budgeted units |
15,00,000.00 |
9,00,000.00 |
12,00,000.00 |
|
Cost per unit |
121.92 |
179.90 |
378.84 |
|
Price per unit |
170.69 |
233.87 |
435.67 |
|
Profit |
48.77 |
53.97 |
56.83 |
|
Profit in % |
0.29 |
0.23 |
0.13 |
2. The following is the required solution:
(Amounts in £) |
|||
Budgeted units |
15,00,000.00 |
9,00,000.00 |
12,00,000.00 |
Particulars |
Phone |
Tablet |
Computer |
Direct material |
1350,00,000.00 |
1260,00,000.00 |
3780,00,000.00 |
Direct labour |
240,00,000.00 |
180,00,000.00 |
384,00,000.00 |
Utilities |
80,00,000.00 |
50,00,000.00 |
70,00,000.00 |
Rent |
82,50,000.00 |
22,50,000.00 |
45,00,000.00 |
Audit and legal |
29,00,000.00 |
12,50,000.00 |
8,50,000.00 |
Administrative staff |
232,00,000.00 |
60,00,000.00 |
108,00,000.00 |
Total cost |
2013,50,000.00 |
1585,00,000.00 |
4395,50,000.00 |
divided by the number of budgeted units |
15,00,000.00 |
9,00,000.00 |
12,00,000.00 |
|
|
|
|
Cost per unit |
134.23 |
176.11 |
366.29 |
Profit % |
0.29 |
0.23 |
0.13 |
Price per unit |
172.59 |
216.75 |
414.07 |
3. Activity based costing method is the method in which the cost to the various activities are allocated on the basis of the activity drivers in each of the product. This is the most logical method of allocating the cost since this is the way in which the cost will be allocated on the basis of the amount of the activities that are used in the business.
(Accounting coach, 2015)
The companies must go for the costing method that requires them to implement the ABC in the 5 step product costing sequence. In this, the direct costs that are associated with the cost of the object are identified. For a given object of the cost, the company attempts to identify all the costs that are currently being treated as the overhead cost and is capable of being traced directly to the product. The costs must be removed from the pool of the overheads and directly be traced to the product. This way the costs are started to be assigned to the individual products and jobs.
(Classes.bus.oregonstate.edu, 2015)
The following are the main advantages of the ABC due to which the company must go for it:
(Managers-net.com, 2014)
The second method of costing strategy seems logical since, the prices have been determine keeping in mind the ABC costing method.
References:
Managers-net.com, (2014). Activity Based Costing (ABC). Retrieved 19 October 2014, from https://www.managers-net.com/activityBC.html
AccountingCoach.com, (2015). Activity Based Costing | Explanation | Accounting Coach. Retrieved 31 January 2015, from https://www.accountingcoach.com/activity-based-costing/explanation
Classes.bus.oregonstate.edu, (2015). CHAPTER 11: ACTIVITY-BASED COSTING. Retrieved 31 January 2015, from https://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%2011.htm
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