One of BlueBlush Beauty’s best-selling products is its facial washes. It currently sells two types of facial washes, the Hydrating Face Cleanse (HFC) and the Moisture Face Wash (MFW). The major cost in these products is its raw materials; however, there is a substantial amount of manufacturing overhead in the mixing and blending process. The company incurs relatively low direct labour hours (115,000 hours annually) and its average direct labour rate is $12 per hour. It has been using a traditional, volume-based product costing system that allocates manufacturing overhead costs based on direct labour hours. The expected prime costs for 1 tube of these two facial washes are as follows: Hydrating Face Cleanse Moisture Face Wash Raw materials costs $ 3.70 $ 7.90 Direct labour costs (0.1 hour at $12 per hour) $ 1.20 $ 1.20 The company is currently selling the Hydrating Face Cleanse and the Moisture Face Wash at $19.99 and $28.99 respectively. BlueBlush Beauty’s Management Accountant, Mickee Lee, believes that the traditional product costing system may be providing misleading cost information. She is interested in implementing an activity-based costing system and has completed an analysis of the annual budgeted manufacturing overhead costs as shown below: Activity Cost Driver Budgeted Activity Budgeted Cost ($) Purchasing No. of purchase orders 1,579 236,850 Quality Control No. of production batches 250 136,800 Material Handling No. of setups 1,247 561,150 Blending No. of blending hours 48,050 480,500 Packaging No. of packaging hours 28,900 184,700 Total 1,600,000 Annual data relevant to the two facial washes are as follows: Hydrating Face Cleanse Moisture Face Wash Budgeted production (tubes) 1,000,000 150,000 No. of purchase orders 1,075 504 Production batch size (tubes) 10,000 1,000 No. of setups 494 753 No. of blending hours 31,050 17,000 Packaging time (hours) 2.5 hr per 100 tubes 2.6 hr per 100 tubes Required: (Show all workings / calculations for your answers)

a) Determine BlueBlush Beauty’s current predetermined overhead rate using direct labour hours as the single cost driver. (2 marks)

b) Determine the product costs and target selling prices of one tube of Hydrating Face Cleanse (HFC) and Moisture Face Wash (MFW) based on the current traditional method of allocating manufacturing overhead costs. (5 marks)

c) Which product (HFC or MFW) is more profitable in terms of gross profit per tube? Explain your answer. (3 marks)

d) Using the activity-based costing approach, determine the following: i) Activity rate for each of the five activities identified. ii) Product costs and target selling prices of one tube of HFC and MFW. (Hint: Are you given the activity consumption rate of the two types of facial wash for certain activities such as quality control?) (13 marks)

e) By how much is the Moisture Face Wash under-costed or over-costed under the current traditional costing system? Explain the reason for the difference in the Moisture Face Wash’s product costs. (5 marks)

f) In view of the intense competition, the Sales Manager, Coco Wong, is considering reducing the current selling price of the Hydrating Face Cleanse and the Moisture Face Wash to $10.99 and $18.99 respectively. Assume you are BlueBlush Beauty’s Management Accountant, Mickee Lee and you are tasked to evaluate the proposal to reduce the selling price. Write a memo to the CEO, Leong Hoho to report your findings/analysis on both the traditional, volume-based and activitybased costing system. You are to include the options available to the management as well as your recommendations in the memo. 

Answer rating: 100% (QA)

Answer Solution HFC MFW Total d Activity Cost driver Budgeted activity Budgeted cost Activity rate a ... View the full answer