ABC, Inc., manufactures only two products: Gadget A and Gadget B. The firm uses a single, plant wide overhead rate based on direct-labor hours. Production and product-costing data are as follows:

Gadget A

Gadget B

Production quantity

1,000 units

5,000 units

Direct material

Rs.160

Rs.240

Direct labor (not including setup time)

Rs. 120 (4 hr. at Rs.30)

Rs. 180 (6 hr. at Rs.30)

Manufacturing overhead*

Rs. 384 (4 hr. at Rs.96)

Rs. 576 (6 hr. at Rs.96)

Total cost per unit

Rs. 664

Rs. 996

*Calculation of predetermined overhead rate:

Manufacturing overhead budget:

Machine-related costs Rs.1,800,000

Setup and inspectionRs. 720,000

EngineeringRs. 360,000

Plant-related costsRs. 384,000

Total Rs. 3,264,000

ABC, Inc., prices its products at 120 percent of cost, which yields target prices of Rs.796.80 for Gadget A and Rs.1,195.20 for Gadget B. Recently, however, ABC has been challenged in the market for Gadget B by a European competitor, Quantum Corporation. A new entrant in this market, Quantum has been selling Gadget B for Rs.880 each. ABC's president is puzzled by Quantum's ability to sell Gadget B at such a low cost. She has asked you (the controller) to look into the matter. You have decided that ABC's traditional, volume-based product-costing system may be causing cost distortion between the firm's two products. Gadget B are a high-volume, relatively simple product. Gadget A, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.

Required:

1. Let each of the overhead categories in the budget represent an activity cost pool. Categorize each in terms of the type of activity (e.g., unit-level activity).
2. The following cost drivers have been identified for the four activity cost pools.

Activity Cost Pool

Cost Driver

Budgeted Level of Cost Driver

Machine-related costs

Machine hours

18,000 hr.

Setup and inspection

Number of production runs

80 runs

Engineering

Engineering change orders

200 change orders

Plant-related costs

Square footage of space

3,840 sq. ft.

You have gathered the following additional information:

• Each odd requires 8 machine hours, whereas each end requires 2 machine hours.
• Gadget A are manufactured in production runs of 25 units each. Gadget B are manufactured in 125 unit batches.
• Three-quarters of the engineering activity, as measured in terms of change orders, is related to Gadget A.
• The plant has 3,840 square feet of space, 80 percent of which is used in the production of Gadget A.
• For each activity cost pool, compute a pool rate.

1. Determine the unit cost, for each activity cost pool, for Gadget A and Gadget B.
2. Compute the new product cost per unit for Gadget A and Gadget B, using the ABC system.
3. Using the same pricing policy as in the past, compute prices for Gadget A and Gadget B. Use the product costs determined by the ABC system.

ABC, Inc., manufactures only two products: Gadget A and Gadget B. The firm uses a single, plant wide overhead rate based on direct-labor hours. Production and product-costing data are as follows:

Gadget A

Gadget B

Production quantity

1,000 units

5,000 units

Direct material

Rs.160

Rs.240

Direct labor (not including setup time)

Rs. 120 (4 hr. at Rs.30)

Rs. 180 (6 hr. at Rs.30)

Manufacturing overhead*

Rs. 384 (4 hr. at Rs.96)

Rs. 576 (6 hr. at Rs.96)

Total cost per unit

Rs. 664

Rs. 996

*Calculation of predetermined overhead rate:

Manufacturing overhead budget:

Machine-related costs Rs.1,800,000

Setup and inspectionRs. 720,000

EngineeringRs. 360,000

Plant-related costsRs. 384,000

Total Rs. 3,264,000

ABC, Inc., prices its products at 120 percent of cost, which yields target prices of Rs.796.80 for Gadget A and Rs.1,195.20 for Gadget B. Recently, however, ABC has been challenged in the market for Gadget B by a European competitor, Quantum Corporation. A new entrant in this market, Quantum has been selling Gadget B for Rs.880 each. ABC's president is puzzled by Quantum's ability to sell Gadget B at such a low cost. She has asked you (the controller) to look into the matter. You have decided that ABC's traditional, volume-based product-costing system may be causing cost distortion between the firm's two products. Gadget B are a high-volume, relatively simple product. Gadget A, on the other hand, are quite complex and exhibit a much lower volume. As a result, you have begun work on an activity-based costing system.

Required:

1. Let each of the overhead categories in the budget represent an activity cost pool. Categorize each in terms of the type of activity (e.g., unit-level activity).
2. The following cost drivers have been identified for the four activity cost pools.

Activity Cost Pool

Cost Driver

Budgeted Level of Cost Driver

Machine-related costs

Machine hours

18,000 hr.

Setup and inspection

Number of production runs

80 runs

Engineering

Engineering change orders

200 change orders

Plant-related costs

Square footage of space

3,840 sq. ft.

You have gathered the following additional information:

• Each odd requires 8 machine hours, whereas each end requires 2 machine hours.
• Gadget A are manufactured in production runs of 25 units each. Gadget B are manufactured in 125 unit batches.
• Three-quarters of the engineering activity, as measured in terms of change orders, is related to Gadget A.
• The plant has 3,840 square feet of space, 80 percent of which is used in the production of Gadget A.
• For each activity cost pool, compute a pool rate.

1. Determine the unit cost, for each activity cost pool, for Gadget A and Gadget B.
2. Compute the new product cost per unit for Gadget A and Gadget B, using the ABC system.
3. Using the same pricing policy as in the past, compute prices for Gadget A and Gadget B. Use the product costs determined by the ABC system.