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# Alpha Manufacturing and Activity Based Costing

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Alpha Manufacturing produces two types of entry doors, deluxe and standard. The assignment basis for support cost has been direct labor dollars. For 2008 Alpha compiled the following data for the two products:

Deluxe Standard
Sales units 50,000 400,000

Sales price per unit \$650.00 \$475.00
Direct material and labor cost per unit \$180.00 \$130.00
Manufacturing support cost per unit \$30.00 \$120.00

Last year Alpha Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2008.

Activity cost Drive Cost Total Deluxe Standard
setups of setups \$500,000 500 400 100
Machine - related of machine hours \$44,000,000 600,000 300,000 300,000
Packing of shipments \$5,000,000 250,000 50,000 200,000

Required:

a) Using the current system, what is the estimated,
1. Total cost of manufacturing one unit for each type of door?
2. Profit per unit for each type of door?
b) Using the activity-based costing data presented above.
1. Compute the revised total cost to manufacture one unit of each type of entry door.
2. Compute the profit per unit for each type of door.
c) Explain the pros and cons of activity based costing.

##### Solution Summary

The solution examines Alpha Manufacturing and Activity Base Costing. The pros and Cons are provided.

##### Solution Preview

See attached Excel file.

Meaning:

Activity-Based Costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to products and services according to the actual consumption by each in order to arrive at the actual cost of products and services.

In Activity based costing costs of all organisation's resources are assigned to the products and services that the organisation manufacture/render. The main intention behind the assignment of resource cost to the product/services is to find out the cost of the product and the resultant profitability.

Purpose:

The main purpose of Activity Bases costing is the elimination of unprofitable activities in the organisation. Further, to identify the over priced activities in order to lower the prices of those activities. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.
Following are the steps to be followed in ABC.

1. Identify cause and effect relationships of all the activities to assign costs to the activities.

2. Costs of the activities are to be computed. ...

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