Rolo plc manufactures two types of industrial vacuum cleaner, Gobble and Wolf-and currently applies manufacturing overhead...

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Rolo plc manufactures two types of industrial vacuum cleaner, Gobble and Wolf-and currently applies manufacturing overhead to all units at the rate of €140 per machine hour. Selling prices, as a general rule, are set based on cost plus 20 per cent. Production information follows: Wolf 18,000 Gobble Sales units 450 Direct material cost per unit Direct labour cost per unit Machine time €27 €40 €20 €20 2 hours per unit 0.5 hours per unit Rolo plc is the market leader with regards sales of the Gobble, a hi-tech model, presumably the fact that the selling price is well below that of the competition has something to do with this. On the other hand, it is proving more difficult to increase the sales volume of the Wolf, the basic model. Despite all marketing efforts, demand, currently at 18,000 units, is declining. The finance manager has suggested consideration be given to implementing Activity Based Costing for the purpose of identifying more accurate product costs which in turn will feed into determining the selling price. The following activity cost pools and cost drivers have been identified Activity cost pool Activity Qty of cost driver Gobble(to Wolf(to make 18,000 units) 15 make 450 units) Manufacturing set-up Machine processing Product shipping Total overhead cost: 724,000 382,000 280,000 €1,386,000 50 set ups 35 9,900 machine hours 70 shipments 900 9.000 50 20 Required: (a) Calculate the unit product cost for each type of vacuum cleaner under the existing costing method. (b) Calculate the unit product cost for each type of vacuum cleaner under the Activity Based Costing method. (c) Explain, with reference to the calculations in (a) and (b) above, what advantages the finance manager probably believes ABC to have over the existing approach. Rolo plc manufactures two types of industrial vacuum cleaner, Gobble and Wolf-and currently applies manufacturing overhead to all units at the rate of €140 per machine hour. Selling prices, as a general rule, are set based on cost plus 20 per cent. Production information follows: Wolf 18,000 Gobble Sales units 450 Direct material cost per unit Direct labour cost per unit Machine time €27 €40 €20 €20 2 hours per unit 0.5 hours per unit Rolo plc is the market leader with regards sales of the Gobble, a hi-tech model, presumably the fact that the selling price is well below that of the competition has something to do with this. On the other hand, it is proving more difficult to increase the sales volume of the Wolf, the basic model. Despite all marketing efforts, demand, currently at 18,000 units, is declining. The finance manager has suggested consideration be given to implementing Activity Based Costing for the purpose of identifying more accurate product costs which in turn will feed into determining the selling price. The following activity cost pools and cost drivers have been identified Activity cost pool Activity Qty of cost driver Gobble(to Wolf(to make 18,000 units) 15 make 450 units) Manufacturing set-up Machine processing Product shipping Total overhead cost: 724,000 382,000 280,000 €1,386,000 50 set ups 35 9,900 machine hours 70 shipments 900 9.000 50 20 Required: (a) Calculate the unit product cost for each type of vacuum cleaner under the existing costing method. (b) Calculate the unit product cost for each type of vacuum cleaner under the Activity Based Costing method. (c) Explain, with reference to the calculations in (a) and (b) above, what advantages the finance manager probably believes ABC to have over the existing approach.

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1 Computation of unit product cost under existing costing system Description Gobble wolf Direct mate... View the full answer