ACTIVITY BASED COSTING METHOD

Details ABC DEF GHI Total

Prime Cost $ 32.00 $ 84.00 $ 65.00

#of units to be produce $ 50,000.00 $ 40,000.00 $ 30,000.00

Total Prime cost $ 1,600,000.00 $ 3,360,000.00 $ 1,950,000.00 $

6,910,000.00

Less: Overheads

Machine Service 85,000 170,000 102,000

Assembling Service 210,000 72,000 36,000

Set up Cost 6,000 10,000 10,000

Ordering Cost $ 39,000.00 $ 39,000.00 $ 78,000.00

Purchase Cost $ 22,500.00 $ 30,000.00 $ 31,500.00

Total Cost as ABC $ 1,962,500.00 $ 3,681,000.00 $ 2,207,500.00 $

7,851,000.00

Selling Price Per Unit 45 95 73

Sales in $ $ 2,250,000.00 $ 3,800,000.00 $ 2,190,000.00 $

8,240,000.00

Profit using ABC $ 287,500.00 $ 119,000.00 $ (17,500.00) $

389,000.00

Machine Hours (units produced * per unit) (2*50,000) = 100,000 (5*40,000) =200,000 (4*30,000) =120,000 420,000

Direct Labour Hours (units produced * per unit) (7*50,000) = 350,000 (3*40,000) = 120,000 (2*30,000) = 60,000 530,000

Cost Pool Cost Drivers Activity Rate

Machine Service Machine hours used 0.85

Assembling Service Labour hours used 0.6

Set up Cost number of set ups 216.67

Ordering Cost customer orders 4.88

Purchase Cost supplier order 0.75

b) Volume related cost drivers refers to cost that varies with each level of production, for example,
machine hours and labour hours as displayed in the question above. However, transaction-based cost
drivers only varies with the activities instead of production levels such as set ups and customer orders.

c) Using transaction-based cost drivers, firstly it can improve the accuracy of pricing decisions, especially
when there is a variety of products being offered and it would be harder to correctly allocate cost using
only volume-based cost drivers. In addition, transaction-based cost drivers deals with cost in the long
run rather than short run which can benefit the organization by making better decisions or create new
ways to improve products.

LASERFIX PRIVATE HOSPITAL

Throughput Per Hour

Details A B C

$ $ $

Selling Price $ 2,500.00 $ 3,400.00 $ 4,200.00

Less Direct Materials:

Pre-operative Injections $ (600.00) $ (700.00) $ (900.00)

Anesthetic $ (25.00) $ (35.00) $ (50.00)

Dressing $ (4.80) $ (4.80) $ (4.80)

Throughput per unit $ 1,870.20 $ 2,660.20 $ 3,245.20

Bottleneck time in hours used by one procedure 0.6 0.9 1.2

Throughput per hour $ 3,117.00 $ 2,955.78 $ 2,704.33

Factory Cost (282,000 + $200,000) $482,000

Factory Hours /1880

Factory Cost Per Hour $256,38 $ 256.38 $ 256.38 $ 256.38

TPAR $ 12.16 $ 11.53 $ 10.55

Ranking 1st 2nd 3rd

Annual Demand 500 700 800

Surgeon Hours 0.6 0.9 1.2

Surgeon Hours For the Year 300 630 960

To Determine the Product Mix

Total Surgeon Time Available 1880

1st Ranking Procedure A (300)

Hours Available 1580

2nd Ranking Procedure B (630)

Hours Available 950

3rd Ranking Procedure C (792*1.2) (950)

Hours Available 0

C) The optimal product mix is offering the public 300 procedure for A, 630 procedure for B and 950 for C

Procedure Demand Throughput per unit Profit

A 500 $ 1,870.20 $ 935,100.00

B 700 $ 2,660.20 $ 1,862,140.00

C 792 $ 3,245.20 $ 2.570,198.00

Total Throughput $ 5,367,438.00

 Less Factory Cost $ (482,000.00)

Net Profit $ 4,885,438.00

b) Based on the Throughput Accounting Ratio Procedure A would be the first to be carried out
because it has the highest ratio which is 12.16. Procedure B would follow be carried out next
because it has the second highest ratio and then Procedure c would be done last because it has the
lowest ratio.

a) Determine the budgeted sales mix:

Product X Y Z

Sales Volume in Units 25,000 20,000 15,000

SMR 5 4 3 Each was divided by

5,000

b) Compute the contribution to Sales Ratio:

Selling Price per unit $250 $400 $190

Less variable Cost:

Materials

Labour 60 50 28.75

Royalties 30.6 39.7 20.68

Production Overhead Cost (55% * Overhead) 39 41.67 26.73

Total Variable Cost 131.6 136.37 80.66

CMU 118.41 263.63 109.34

Total CMU (CMU*SMR) 592.03 1054.53 328.02 1974.58

Total CMU (Sales *SMR) 1250 1600 570 3420

Contribution to Sales = Total contribution/Sales 0.58

c) Compute the total production overheads and the fixed

overheads

25,000*70.90 = $1,772,500

Production Overhead X = $974,875

Production Overhead Y =

20,000*75.76 = $1,515,000

Production Overhead z= $400,950

Fixed Overhead for X = 797,625

Fixed Overhead for Y = $375,012

Fixed Overhead Z = $328050

Total = 1,500,687

d) Compute the breakeven point in $

 Total Fixed Overhead $
1,500,687.00

Breakeven in Sales
$2,587,391

$
6,250,000.00

$
8,000,000.00

$
2,850,000.00

$
17,100,000.00

e) Margin of Safety = $14,512,609

(a) Activity-based recovery rates for each cost pool:

Production set ups: $300 per set-up ($120,000 ÷ 400)

Product testing: $315 per test ($315,000 ÷ 1,000)

Component supply and storage: $40 per component order ($24,000 ÷ 600)

Customer orders and delivery: $140.50 per customer order ($140,500 ÷ 1,000)

(b) General overhead rate per unit:

The general fixed overheads are absorbed on a direct labour hour basis. Total labour hours for next year
are expected to be 400,000 hours. Therefore, the general overhead rate per unit is:

General overhead rate per unit = Total general fixed overheads ÷ Total labour hours

= $800,000 ÷ 400,000 hours

= $2 per hour

(c) Direct labour cost per unit of BH8:

Direct labour is 15 minutes per unit, which is 0.25 hours per unit. The direct labour cost per unit is:
Direct labour cost per unit = Direct labour time per unit × Direct labour rate per hour

= 0.25 hours × $6.25 per hour

= $1.5625 per unit

(d) Selling price for one unit of BH8:

Component cost per unit = $1.50 per unit

Direct labour cost per unit = $1.5625 per unit

Activity-based cost per unit:

Production set ups: $300 ÷ 1,000 units = $0.30 per unit

Product testing: $315 ÷ 1,000 units = $0.315 per unit

Component supply and storage: $40 ÷ 1,000 units = $0.04 per unit

Customer orders and delivery: $140.50 ÷ 150 orders of 40 units + 50 orders of 80 units = $1.26 per unit

Total activity-based cost per unit = $0.30 + $0.315 + $0.04 + $1.26 = $1.915 per unit

Total cost per unit = Component cost per unit + Direct labour cost per unit + Total activity-based cost per
unit

= $1.50 + $1.5625 + $1.915

= $4.9775 per unit

Profit mark-up = 35% of total unit cost = 35% × $4.9775 = $1.7416 per unit

Selling price per unit = Total cost per unit + Profit mark-up per unit

= $4.9775 + $1.7416

= $6.7191 per unit

(e) The statement that is true about activity-based costing is:

(2) The cost driver for materials handling and dispatch costs are likely to be the number of orders.

(f) The following statements are true about Jam Company:

(1) Unlike traditional absorption costing, ABC identifies variable overhead costs in the production of
BH8.

(2) ABC can be used as an information source for budget planning based on activity rather than
incremental budgeting.

Therefore, the answer is "Both 1 and 2".

Regenerate response