Classic Company produces high quality components used in sewing and embroidery machines. It sells products directly...

 

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Classic Company produces high quality components used in sewing and embroidery machines. It sells products directly to the manufacturers all over the world. The company adds a 40% mark-up to the cost of the components. In the next year, the company expects 180 orders of 50 units each for one of its products, Beta. The following information relates to per unit of Beta: Material: $1.25 Direct Labour: $1.63 Machine hours: 90 minutes Engineering hours: 10 minutes Total production overheads are $520,000 and further analysis shows that the total production overheads can be divided as follows: Activity Costs (%) Engineering Set up costs Machine operating costs Quality control 30 20 35 15 Cost Driver Engineering hours Machine set up Machine hours Number of checks Number of drivers 25,000 125 100,000 1,250 The company holds no inventory of Beta and will need to produce the requirement. In a production run, 900 units of Beta can be produced. Each production run requires four quality control checks. Required: (a) Calculate the total cost and selling price of one unit of Beta using machine hours to absorb the overhead cost. (6 marks) (b) Calculate the total costs and selling price per unit of Beta using activity-based costing. (10 marks) (c) Compare and comment on the costs computed under the traditional and activity-based costing methods. (5 marks) (d) Discuss any four reasons why activity-based costing is preferable to traditional absorption costing. (4 marks) Classic Company produces high quality components used in sewing and embroidery machines. It sells products directly to the manufacturers all over the world. The company adds a 40% mark-up to the cost of the components. In the next year, the company expects 180 orders of 50 units each for one of its products, Beta. The following information relates to per unit of Beta: Material: $1.25 Direct Labour: $1.63 Machine hours: 90 minutes Engineering hours: 10 minutes Total production overheads are $520,000 and further analysis shows that the total production overheads can be divided as follows: Activity Costs (%) Engineering Set up costs Machine operating costs Quality control 30 20 35 15 Cost Driver Engineering hours Machine set up Machine hours Number of checks Number of drivers 25,000 125 100,000 1,250 The company holds no inventory of Beta and will need to produce the requirement. In a production run, 900 units of Beta can be produced. Each production run requires four quality control checks. Required: (a) Calculate the total cost and selling price of one unit of Beta using machine hours to absorb the overhead cost. (6 marks) (b) Calculate the total costs and selling price per unit of Beta using activity-based costing. (10 marks) (c) Compare and comment on the costs computed under the traditional and activity-based costing methods. (5 marks) (d) Discuss any four reasons why activity-based costing is preferable to traditional absorption costing. (4 marks)

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