Purchase Solution

# Activity Based Costing, special order, incremental cost

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Calculating cost
1. During class we discussed the need to be able to calculate the "cost" of a product. Please indicate why the "cost" of a product is important information for a business manager. In addition, please give an example of overhead allocation using a single cost pool and an example (using the same numbers) of overhead allocation using Activity Based Costing

2. Happy Apparel Company produces small kitchen appliances. The manufacturing costs per unit to produce a small can opener are shown below:
Direct Materials . . . . . . . . . . . . .\$6.50
Direct Labor . . . . . . . . . . . . . . . . 3.75
Variable Overhead. . . . . . . . . . . 4.25
Fixed Overhead. . . . . . . . . . . . . 6.00
Total per unit \$20.50

Variable selling costs to obtain and fill orders normally average \$1.50 per unit when Happy sells the can opener to local customers. Recently Happy paid \$40,000 to advertise its various products in an international trade magazine. The company has just received an order from a large mail-order merchandising company in Brazil for 700 openers at a total price of \$12,000. The merchandising company is willing to pay all shipping charges except the initial packaging, which cost \$0.75 per opener.

You have been asked to calculate the total incremental cost that Happy would expect to incur if it accepted the order. In addition, should Happy produce and sell the 700 openers? Why or why not?

3. Color me Pink Company produces two products, Crayons and Markers. Its normal activity is 600,000 boxes of Crayons and 200,000 boxes of Markers. Color uses ABC and has developed the following "activity" information for these products.

EXPECTED NUMBER OF ACTIVITIES (DRIVER UNITS)
COST DRIVERS CRAYONS MARKERS TOTAL

Machine hours (MH) 160,000 40,000 200,000
Direct labor hours (DLH) 300,000 160,000 460,000
Color Changes (CC) 1,200,000 400,000 1,600,000

Color traces its \$2585,000 total variable factory overhead costs to the following activity pools.

ACTIVITY POOL TRACEABLE COSTS

Machine hours related \$800,000
Direct labor related 345,000
Color change related 1,440,000

Color has \$920,000 of fixed factory overhead costs that are not traceable to an identifiable cost driver and assigns these costs to boxes based on 460,000 direct labor hours. It takes 0.5 direct labor hours to produce a box of Crayons and 0.8 hours to produce a box of Markers.

You have been asked to determine Color's total overhead cost per box of Crayons and per unit of Markers. In addition, determine the average driver units per box of Markers, which you computed above.

##### Solution Summary

Answers to 3 questions on costing:
1) overhead allocation using Activity Based Costing
2) Calculation of incremental cost for a special order for Happy Apparel Company
3) calculation of total overhead costs using ABC

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