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Absorption method activity based costing: computer devices

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A computer manufacturer produces three types of devices: mobile phones, tablets, and computers. For the production of these three devices you have the following information:
Phone Tablet Computer
Material cost per unit £90 £140 £315
Direct labor hours per unit 2 2.5 4
Budgeted units 1,500,000 900,000 1,200,000

Labor cost per hour £8

Overhead costs per annum
Utilities £20,000,000
Rent £15,000,000
Audit and legal £5,000,000
Administrative staff £40,000,000
Total £80,000,000
ABC analysis suggested that overhead costs are distributed to the three products according to the table below:
Overheads Phone Tablet Computer
Utilities £8,000,000 £5,000,000 £7,000,000
Rent £8,250,000 £2,250,000 £4,500,000
Audit and legal £2,900,000 £1,250,000 £850,000
Administrative staff £23,200,000 £6,000,000 £10,800,000
For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be:
Phone Tablet Computer
Full costing price £170.69 £233.87 £435.67
1. Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours.
2. Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system.
3. Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company.

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Your tutorial is attached and gives you a spreadsheet table to compute the profit by product line and the ...

Solution Summary

Your tutorial is attached and gives you a spreadsheet table to compute the profit by product line and the percent profit by product line using direct labor hours (requires that you compute the DLHs first). Then, I compute overhead using ABC and finally a target price that maintains the profit percent. Click in cells to see computations. Two paragraphs discuss the costing and pricing policies to get you started on this analysis.

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