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A company manufactures refrigrators for domestic use .There are three models: Lo ,Mid and Hi.The Models ,their quality and their price are aimed at different markets..Product costs arecomputed on ablanket (business-wide)overheadrate basis using a labour-hour method .Prices as a general rule areset based on cost plus 20 per cent. the following information is provided:

Lo Mid Hi

Material Cost(pound/unit) 25 62.5 105
Direct Labour hours(per unit) 1/2 1 1
Budget production/sales(unit) 20,000 1,000 10,000

The budgeted overheads for the business amount to 4,410,000 pound sterling. Direct labour is costed at 8 pounds an hour.
The business is currently facing increasing competition ,especially from imported goods .As a result ,the selling price of Lo has been reduced to a level that produces avery low profit margin.To address this problem,an activity -based costing approach has been suggested .The overheads are examined and these are grouped around main business activities of machining (2,780,000 pounds) ,logistics(590,000 pounds)and establishment (1,040,000 pounds)costs.It is maintained that these costs could be allocated based respectively on cost derivers of machine hours ,material orders and space,to reflect the use of resources in each of these areas.After analysis ,the following proportionate statisticsare available in relation to the total volume of products:

Lo Mid Hi
% % %
Machine Hours 40 15 45
Material orders 47 6 47
Space 42 18 40

As the mangement Accountant of this company do the following:
1-Calculate for each product the full cost and selling price determined by :'
a- The original costing method
b- The activity -based costing method
When the figures are computed ,prepare adetailed report for your boss that includes a discussion of the following information:

-An analysis of implications involved with each of the two costing systems and subsequent price differences.

-An analysis of each costing system ,including a recommendation of which cost system you would recommend or any changes you would suggest to the pricing strategy .

-an analysis of the business/strategic options that exist for your organization in light of the new information ,including possible pricing strategies.

The report should be preparedas a concisebusiness report to your supervisor that includes both the figures computed and the analysis of the situation .This

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Solution Summary

The solution explains the calculation of product cost using traditional costing and activity based costing

See Also This Related BrainMass Solution

BYP2-1 Managerial Accounting/ Job Costing

BYP2.1 Du Page Products Company uses a job order cost system. For a number of months
there has been an ongoing rift between the sales department and the production
department concerning a special.order product, TC.1. TC.1 is a seasonal product
that is manufactured in batches of 1,000 units. TC.1 is sold at cost plus a markup
of 40% of cost.
The sales department is unhappy because fluctuating unit production costs
significantly affect selling prices. Sales personnel complain that this has caused
excessive customer complaints and the loss of considerable orders for TC.1.
The production department maintains that each job order must be fully costed on
the basis of the costs incurred during the period in which the goods are produced.
Production personnel maintain that the only real solution to the problem is for the
sales department to increase sales in the slack periods.
Sandra Devona, president of the company, asks you as the company accountant
to collect quarterly data for the past year on TC.1. From the cost accounting system,
you accumulate the following production quantity and cost data.

Costs 1 2 3 4
Direct materials $100,000 $220,000 $80,000 $200,000
Direct labor 60,000 132,000 48,000 120,000
Manufacturing 105,000 123,000 97,000 125,000
Total 265,000 475,000 225,000 445,000 225,000

Production in 5 11 4 10

Unit cost (per $53,000 $43,182 $56,250 $44,500

With the class divided into groups, answer the following questions.
a. What manufacturing cost element is responsible for the fluctuating unit costs?
b. What is your recommended solution to the problem of fluctuating unit costs?
c. Restate the quarterly data on the basis of your recommended solution.

The problem is located in Chapter 2.

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