Reference no: EM133065773

Question 1

Activity Based Costing

Kestral manufacturing Ltd has estimated the following activity costs and activity drivers for the current period.

Activities	Total activity costs	Cost driver	Total activity level
Machine set up	$40 000	No. of set-ups	400
Materials handling	160 000	No. of material removals	16000
Product design	100 000	Design hours	2000
Inspection	260 000	No. of inspections	13000
Total cost	$560 000

Information for a particular job (job no. 42) completed during the period is as follows:

Direct materials	$10 000
Direct labour	$4 000
Units completed	200
No. of set-ups	2
No. of material removals	60
No. of inspections	40
No. of design hours	20

Required:
1) Calculate the activity rate for each of the four manufacturing activities;
2) Calculate the total costs for job 42;
3) Calculate the cost per unit for job 42.

Question 2

The Nadel Corporation previously used a conventional product costing system in which there were two direct cost categories: direct material and direct labour. Manufacturing overhead was allocated based on the number of direct labour hours ($115 per hour).

The company now considers using ABC for two particular jobs, job 200 and 201. The direct material costs (per job) are $9,700 for job 200 and $59,900 for job 201. The direct labour costs (per job) are $750 for job 200 and $11,250 for job 201. Additional information are also identified as follows (next slide):

Activity Area	activity driver	Activity rate
Material handling	No. of parts	$0.60
Lathe work	No. of turns	$0.30
Milling	No. of machine hours	$12.50
Grinding	No of parts	$0.80
Testing (all units tested)	No. of units tested	$18.00

	Job 200	Job201
Labour hours per job	25	375
Parts per job	500	2,000
Turns per job	20,000	60,000
Machine hours per job	150	1,050
Units per job	10	300

Required:
1) Compute the cost per unit of producing each job under the conventional costing system.

2) Compute the cost per unit of each job using activity based costing.

3) Comment on the differences in the costs calculated using the two product costing systems. What are the implications for Nadel Corporation?

Question 3

Pitney Corporation manufactures two types of transponders (i.e. No. 156 and No. 157) and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.

	No.156	No.157
Anticipated volume (units)	6000	14000
Direct material cost /unit	$40	$65
Direct labour cost /unit	25	25

The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked and outgoing shipments, the activities' three respective cost drivers are provided as follows (both budgeted and actual)

The firm's total overhead is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.

Required:
A. Compute the overhead rates that would be used for manufacturing setups, machine processing, and product shipping in an ABC system;
B. Assuming using ABC, compute the unit overhead costs for No.156 and 157 if the expected manufacturing volume is attained;
C. Assuming using ABC, compute the total cost per unit of product No. 156;
D. If the company's selling price is based heavily on cost, would a switch to ABC from the current traditional system result in a price increase or decrease for product No. 156? Show computations.