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ABC Costing for Sola Systems; profit by product region panel

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Sola Systems, a company focussed on clean, energy products assembles and sells two types of solar panels, Panel A and Panel B. The company's sales occur in two regions - One is called Northern and incorporates Queensland, New South Wales and the Northern Territory. The other is called Southern and incorporates Victoria, Tasmania, South Australia, and Western Australia.

You are Sunny Power and you are to write a report to Ms. Eva Green to assist her in understanding Sola Systems costing systems, problems and alternatives as outlined below.
a) Using the current costing system, calculate the product cost of each panel.
b) Using the current costing system, prepare a classified profit statement by product.
c) Using the current costing system, prepare a classified profit statement by region.
d) Why does Panel A have higher gross and net profit rates than panel B? Make sure to use the case study and your profit statements to support your discussion.
e) Using Activity Based Costing, calculate the product cost of each panel.
f) Using Activity Based Costing, prepare a classified profit statement by product.
g) Using Activity Based Costing, prepare a classified profit statement by region.

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Solution Summary

Your tutorial creates six schedules, three for "previous costing method" and three for "activity based costing (in Excel, attached)." ABC is used for product costs only. A separate file shows ABC for period costs for products but not for north/south (you can figure this out for yourself from the work already done). Click in cells to see computations. Your discussion and recommendations are 560 words.

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A - G (see excel, attached)

h.

Ms. Eva Green:

Activity based costing (ABC) is a more accurate cost of the product costs for Panel A and B and better information for decision-making for several reasons.

(1) Resources consumed

ABC allocates indirect product costs based on overhead resources consumed, not labor costs. Since the overhead consumed is not in the same proportion of labor hours, this makes a difference. For batch costs, under ABC, the two product lines share the batch costs evenly. This is a very different "split" of the batch costs than if you allocated based on direct labor hours.

(2) Awareness of costs per activity

ABC produces an "ala carte" charge for overhead uses showing the incremental costs for activity. For instance, the cost per batch is now computed and shared with managers. This creates some sensitivity about whether to start a new batch for low volume uses since the charge is the same ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
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