# Accounting:Activity based costing.

QUESTION 1

RH Company produces three (3) types of products (X, Y and Z), that consumes a similar direct material, PQR. Presented below is the information with regard to the production of a unit of product:

X Y Z

($) ($) ($)

Direct material cost 250 500 375

Direct labor cost 90 50 70

Support cost:

Variable 75 125 140

Fixed 20 70 50

Selling price 520 800 735

The company is in the process of production planning for the fourth quarter 2009 (October, November and December). The expected production unit for each product in the fourth quarter 2009 is given below:

X Y Z

Minimum unit 1,000 1,000 1,000

Maximum unit 5,000 4,000 3,000

A direct material cost of PQR per meter is $25. Direct labor cost is $10 per hour. Expected stock of PQR for fourth quarter is 150,000 meters. A company having 120 operators, working 8 hours a day, 6 days a week for 24 days per month to produce the products.

REQUIRED:

a) Determine the required direct material (in meter) and direct labor (in hours) to produce a unit of each product.

b) Determine the constraining production factor/s for RH Company.

c) Determine the optimum product mix that should be produced in fourth quarter taking into consideration constraints within the company.

d) RH Company is considering receiving orders from Hanson Co. to supply 1,000 units of X at a price of $580 per unit. Because the order is urgent, 12 direct labor hours are needed to produce the product. Using an appropriate analysis, determine whether a company should receive or reject the orders.

----------Question 2------------

a) Required Direct Material and Direct Labor hours per unit

Product Direct Material Direct Labor

X 250/25 = 10 meter 90/10 = 9 hours

Y 500/25 = 20 meter 50/10 = 5 hours

Z 375/25 = 15 meter 70/10 = 7 hours

b) Product min/max material labor

X 1000 10000 9000

5000 50000 45000

Y 1000 20000 5000

4000 80000 20000

Z 1000 15000 7000

3000 45000 21000

Total min 45000 21000

max 175000 86000

Total resources available for Direct Material is 150000 meter

Labor hours is 120 X 8 X 72 = 69120 hours.

Both Direct Material and Labor hour are constraint to produce maximum of all three products.

c) Contribution Margin for each product

Product X Y Z

CM/ unit 105 125 150

(Selling price - Variable cost per unit)

Product X Y Z

CM / Direct Materials 105/10 125/20 150/15

10.5 6.25 10

CM/ labor hours 105/9 125/5 150/7

11.67 25 21.43

Based on the CM analysis we see that Contribution Margin for Product Z is the highest. If we see the CM for Direct Material contribution we conclude that with one unit of Direct Material the contribution margin for X,Y and Z are 10.5, 6.25 and 10 respectively. This shows that we RH Company could produce more X then Z then only Y. Based on the CM for Labor hours the CM is 11.67, 25 and 21.43 for product X,Y and Z respectively. This shows that RH company should produce product Y, Z and then only product X.

We can conclude that we should maximize product Z then product Y and then only product X as follows :-

Direct Materials Direct Labor

Product Z ( 3000 ) 45000 21000

Product Y ( 4000 ) 80000 20000

Product X ( 2500 ) 25000 22500

Total 150000 63500

d) Sales - RM580/ unit Qty - 1000 = 580000

Cost

Direct material = 250000

Direct labor = 9000 + 120 = 9120

Variable cost = 75000

CM = 580000/334120 = 1.73

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#### Solution Preview

QUESTION 1

RH Company produces three (3) types of products (X, Y and Z), that consumes a similar direct material, PQR. Presented below is the information with regard to the production of a unit of product:

X

($) Y

($) Z

($)

Direct material cost 250 500 375

Direct labor cost 90 50 70

Support cost:

Variable 75 125 140

Fixed 20 70 50

Selling price 520 800 735

The company is in the process of production planning for the fourth quarter 2009 (October, November and December). The expected production unit for each product in the fourth quarter 2009 is given below:

X Y Z

Minimum unit 1,000 1,000 1,000

Maximum unit 5,000 4,000 3,000

A direct material cost of PQR per meter is $25. Direct labor cost is $10 per hour. Expected stock of PQR for fourth quarter is 150,000 meters. A company having 120 operators, working 8 hours a day, 6 days a week for 24 days per month to produce the products.

REQUIRED:

a) Determine the required direct ...

#### Solution Summary

The problem deals with using ABC (activity based costing) to apportion costs to a product.