Muffintop Company makes two types of snack cake, the poppy seed and the blueberry. Basic production information follows:
Poppy seed Blueberry
Direct materials cost per unit $0.75 $0.85
Direct labor cost per unit $0.25 $0.25
Sales price per unit $2.50 $2.50
Expected production per month 140,000 units 190,000 units
Muffintop has monthly overhead of $135,000, which is divided into the following cost pools:
Setup costs $50,000
Quality control 28,300
Maintenance 37,800
Engineering 18,900
Total $135,000
The company has also compiled the following information about the chosen cost drivers:
Poppy seed Blueberry Total
Number of setups required 40 60 100
Number of inspections 75 350 425
Number of machine hours 1,500 750 2,250
Number of Engineering hours 65 70 135
Required:
a) Calculate Muffintopâs gross margin per unit for each product under the traditional costing system. The cost driver for the overhead in the traditional method is machine hours.
b) Calculate Muffintopâs gross margin per unit for each product under the activity based costing system.
c) Compare the gross margin of each product under the traditional system and ABC.
d) Explain the pros and cons of using activity based costing
Muffintop Company makes two types of snack cake, the poppy seed and the blueberry. Basic production information follows:
Poppy seed Blueberry
Direct materials cost per unit $0.75 $0.85
Direct labor cost per unit $0.25 $0.25
Sales price per unit $2.50 $2.50
Expected production per month 140,000 units 190,000 units
Muffintop has monthly overhead of $135,000, which is divided into the following cost pools:
Setup costs $50,000
Quality control 28,300
Maintenance 37,800
Engineering 18,900
Total $135,000
The company has also compiled the following information about the chosen cost drivers:
Poppy seed Blueberry Total
Number of setups required 40 60 100
Number of inspections 75 350 425
Number of machine hours 1,500 750 2,250
Number of Engineering hours 65 70 135
Required:
a) Calculate Muffintopâs gross margin per unit for each product under the traditional costing system. The cost driver for the overhead in the traditional method is machine hours.
b) Calculate Muffintopâs gross margin per unit for each product under the activity based costing system.
c) Compare the gross margin of each product under the traditional system and ABC.
d) Explain the pros and cons of using activity based costing
Related questions
Kinnard Electronics manufactures two home theater systems: theElite which sells for $1,400, and a new model, the Preferred, whichsells for $1,100. The production cost computed per unit undertraditional costing for each model in 2012 was as follows.
Traditional Costing | Elite | Preferred |
Direct materials | $600 | $320 |
Direct labor ($20 per hour) | 100 | 80 |
Manufacturing overhead ($35 per DLH) | 175 | 140 |
Total per unit cost | $875 | $540 |
In 2012, Kinnard manufactured 20,000 units of the Elite and10,000 units of the Preferred. The overhead rate of $35 per directlabor hour was determined by dividing total expected manufacturingoverhead of $4,900,000 by the total direct labor hours (140,000)for the two models. Under traditional costing, the gross profit onthe models was: Elite $525 ($1,400 _ $875), and Preferred $560($1,100 _ $540). Because of this difference, management isconsidering phasing out the Elite model and increasing theproduction of the Preferred model. Before finalizing its decision,management asks Kinnard's controller to prepare an analysis usingactivity-based costing (ABC). The controller accumulates thefollowing information about overhead for the year ended December31, 2012.
Expected | Activity- | |||
Use of | Based | |||
Estimated | Cost | Overhead | ||
Activity | Cost Driver | Overhead | Drivers | Rate |
Purchasing | Number of orders | $ 775,000 | 25,000 | $31 |
Machine setups | Number of setups | 580,000 | 20,000 | 29 |
Machining | Machine hours | 3,100,000 | 100,000 | 31 |
Quality control | Number of inspections | 445,000 | 5,000 | 89 |
The cost drivers used for each product were:
Cost Driver | Elite | Preferred | Total |
Purchase orders | 11,250 | 13,750 | 25,000 |
Machine setups | 11,000 | 9,000 | 20,000 |
Machine hours | 40,000 | 60,000 | 100,000 |
Inspections | 2,750 | 2,250 | 5,000 |
Instructions
(a) Assign the total 2012 manufacturing overhead costs to thetwo products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each modelusing ABC costing?
(c) Are management's future plans for the two models sound?Explain.
Problem 4-2A (Part Level Submission)
Schultz Electronics manufactures two large-screen televisionmodels: the Royale which sells for $1,546, and a new model, theMajestic, which sells for $1,315. The production cost computed perunit under traditional costing for each model in 2014 was asfollows.
| Traditional Costing | Royale | Majestic |
| Direct Materials | $640 | $410 |
| Direct Labor ($20 per hour) | 120 | 100 |
| Manufacturing Overhead ($41 per DLH) | 246 | 205 |
| Total per unit cost | $1006 | $715 |
In 2014, Schultz manufactured 25,000 units of the Royale and10,000 units of the Majestic. The overhead rate of $41 per directlabor hour was determined by dividing total expected manufacturingoverhead of $8,154,010 by the total direct labor hours (200,000)for the two models.
Under traditional costing, the gross profit on the models wasRoyale $540 or ($1,546 â $1,006), and Majestic $600 or ($1,315 â$715). Because of this difference, management is consideringphasing out the Royale model and increasing the production of theMajestic model.
Before finalizing its decision, management asks Schultzâscontroller to prepare an analysis using activity-based costing(ABC). The controller accumulates the following information aboutoverhead for the year ended December 31, 2014.
| Activities | Cost Drivers | Estimated Overhead | Expected use of cost Drivers | Activity-Based Overhead Rate |
| Purchasing | Number of Orders | $1,395,450 | 39,870 | $35/order |
| Machine setups | Number of Setups | 967,250 | 18,250 | 53/setup |
| Machining | Machine hours | 4,976,990 | 121,390 | 41/hour |
| Quality control | Number of inspections | 814,320 | 28,080 | 29/inspection |
The cost drivers used for each product were:
| Cost Drivers | Royale | Majestic | Total |
| Purchase orders | 16,510 | 23,360 | 39,870 |
| Machine setups | 5,270 | 12,980 | 18,250 |
| Machine hours | 75,660 | 45,730 | 121,390 |
| Inspections | 11,900 | 16,180 | 28,080 |
Assign the total 2014 manufacturing overhead costs to the twoproducts using activity-based costing (ABC) and determine theoverhead cost per unit. (Round cost per unit to 2decimal places, e.g. $12.25.)
| Royale | Majestic | |
| Total assigned costs | $_______________ | $_____________ |
| Cost per unit | $_______________ | $_____________ |
Problem 4-2A (Part Level Submission)
Schultz Electronics manufactures two large-screen televisionmodels: the Royale which sells for $1,546, and a new model, theMajestic, which sells for $1,315. The production cost computed perunit under traditional costing for each model in 2014 was asfollows.
| Traditional Costing | Royale | Majestic |
| Direct Materials | $640 | $410 |
| Direct Labor ($20 perhour) | 120 | 100 |
| Manufacturing Overhead ($41per DLH) | 246 | 205 |
| Total per unit cost | $1006 | $715 |
In 2014, Schultz manufactured 25,000 units of the Royale and10,000 units of the Majestic. The overhead rate of $41 per directlabor hour was determined by dividing total expected manufacturingoverhead of $8,154,010 by the total direct labor hours (200,000)for the two models.
Under traditional costing, the gross profit on the models wasRoyale $540 or ($1,546 â $1,006), and Majestic $600 or ($1,315 â$715). Because of this difference, management is consideringphasing out the Royale model and increasing the production of theMajestic model.
Before finalizing its decision, management asks Schultzâscontroller to prepare an analysis using activity-based costing(ABC). The controller accumulates the following information aboutoverhead for the year ended December 31, 2014.
| Activities | Cost Drivers | Estimated Overhead | Expected use of costDrivers | Activity-Based OverheadRate |
| Purchasing | Number of Orders | $1,395,450 | 39,870 | $35/order |
| Machine setups | Number of Setups | 967,250 | 18,250 | 53/setup |
| Machining | Machine hours | 4,976,990 | 121,390 | 41/hour |
| Quality control | Number of inspections | 814,320 | 28,080 | 29/inspection |
The cost drivers used for each product were:
| CostDrivers | Royale | Majestic | Total |
| Purchase orders | 16,510 | 23,360 | 39,870 |
| Machine setups | 5,270 | 12,980 | 18,250 |
| Machine hours | 75,660 | 45,730 | 121,390 |
| Inspections | 11,900 | 16,180 | 28,080 |
Assign the total 2014 manufacturing overhead costs to the twoproducts using activity-based costing (ABC) and determine theoverhead cost per unit. (Round cost per unit to 2decimal places, e.g. $12.25.)
| Royale | Majestic | |
| Total assigned costs | 4304320 | 3849690 |
| Cost per unit | 172.17 | 384.97 |
Calculate cost per unit of each model using ABC costing.(Round cost per unit to 2 decimal places, e.g.$12.25.)
| Royale | Majestic | |
| Cost Per Unit | 932.16 | 894.97 |
Calculate gross profit of each model using ABC costing.(Round answers to 2 decimal places, e.g.$12.25.)
| Royale | Majestic | |
| Gross Profit | $_____________ | $_____________ |
