Product price per unit for Bevan's company
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CASES 7-61
Bevans Company makes two products, product X and product Y. Bevans has produced product X for many years without generating any hazardous wastes. Recently, Bevans developed product Y, which is superior to product X in many respects. However, production of product Y generates hazardous wastes. Because of the hazardous wastes, Bevans must deal with hazardous waste disposal, government environmental reports and inspections, and safe handling procedures.
Bevans Company uses a cost driver rate based on machine hours to assign manufacturing support costs to its two products. Because of concerns about the accuracy of the product costing system, Joel Dempsey, the controller, undertook an activity based costing analysis of the manufacturing support costs. The resulting cost information is summarized in the following table:
Product X Product Y
Direct costs (material and Labor) $9,000,000 $4,000,000
Unit Level support $2,000,000 $1,000,000
Batch Level support $15,000,000 $20,000,000
Product Level support $5,000,000 $8,000,000
Environmental support -- $14,000,000
Total machine hours 10,000,000 6,000,000
Number of units 100,000,000 40,000,000
(a) Compute product costs per unit for products X and Y using the current cost driver rate based on machine hours for manufacturing support costs.
(b) Compute product costs per unit per unit for products X and Y using the activity based costing figures provided in the table.
c) Explain the reasons for the differences in cost for each product using the two cost systems.
(d) Bevans has been selling products X and Y at a price equal to 1.5 times the product cost computed using the machine hour based cost driver rate for manufacturing support costs. Compute these prices and provide recommendations to Bevans management concerning profit improvement through pricing changes and cost reduction through manufacturing improvements.
(a)
Product X Product Y Totals
Direct costs(material plus labor)
Unit-level support
Batch-level support
Product-level support
Environmental support
Total support
Total machine hours
Number of units
Current cost driver rate:
Total support machine hours
Costs using current cost driver rate
Direct costs (material plus labor)
Applied support:$4.06 per machine hour
Total costs
Number of units
Cost per unit
(b) Per unit
Costs Unit Costs
Product X Product Y X Y
Direct costs(material plus labor)
Unit-level support
Batch-level support
Product-level support
Environmental support
Total support
Total costs
Number of units
Cost per unit using ABC
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Solution Summary
Word document contains calculation of product price per unit using traditional method and activity based costing.
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