Reference no: EM131217664

The management of Pacific Wellness Centre, a health food company, recently wants to analyze the cost of two of its famous customized products. The customization is not so much on the content but rather on the packaging as some of the firms wants their firm’s logo on the package. In analyzing these products, the management accountant has identified the following data for a typical month in a year. Activity/Resources Cost-Driver Base Activity Cost in a Typical Month Activity Volume in a Typical Month 1. Unit level 1.1 Acquired and use material for Fruity Bar Number of units produced $60,000 1,000,000 units 1.2 Acquired and use direct labor for Fruity Bar Number of direct-labor hours worked 20,000 2,000 direct labor hours 1.3 Acquire and use material for Energy Bar Number of units produced 80,000 800,000 units 1.4 Acquire and use direct labor for Energy Bar Number of direct-labor hours worked 30,000 2,000 direct labor hours 2. Batch Level 2.1 Number of batches 30,000 100 batches 3. Product Level 3.1 Provide product-level advertising Number of promotions 100,000 100 promotions 3.2 Provide product-level records Number of products 20,000 2 products 4. Customer Level 4.1 Take customer product orders Number of customer orders 40,000 2,000 customer orders 4.2 Deal with customer complaints Number of complaints 20,000 1,000 complaints 5. Facility Level 5.1 Supervise direct labor Amount of direct-labor costs 10,000 $50,000 for activities 1.2 and 1.4 (supervision costs = 20% of direct labor costs.) 5.2 Use main building Number of square feet 40,000 10,000 square feet Recently, the company’s management team attended a presentation on Activity Based costing system and wants to compute the total cost and unit cost of two of its major customized products that has the following activities in the month of August: Fruity Bar Energy Bar 1.1 and 1.3 Material 800,000 units 900,000 units 1.2 and 1.4 Direct labor 1,600 hours 2,100 hours 2.1 Quality control – batches 50 batches 40 batches 3.1 Advertising projects – promotions 50 promotions 40 promotions 3.2 Products recorded 1 product 1 product 4.1 Customer orders 800 customer orders 900 customer orders 4.2 Customer complaints 600 complaints 300 complaints 5.1 Direct-labor supervision $16,000 $31,500 5.2 Main building use 6,000 sq. ft. 3,000 sq. ft. Required 1. Use ABC to compute the total cost and unit cost of each of the two products given the activity level for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions] 2. Assume that the company’s traditional costing system had assigned overhead costs at a rate of $0.10 per unit of output plus $20.00 per direct labour hour. Overhead costs are the sum of the batch-level, product-level, customer -level, and facility-level costs. Using this traditional costing approach, compute the cost for each product (including material and direct-labor costs) given the activity level for the month of August. Compute both the total cost and unit cost for each product for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions] 3. Do the units costs of the two products computed under ABC and traditional costing systems differ significantly? If so, what causes the differences? 4. You have just discovered that the product manager of Fruity Bar has been less than honest in reporting the number of direct-labor hours used. In checking the payroll records, you discover that 2,000 direct-labor hours ($20,000 direct-labor costs) actually were used in August to produce Fruity Bar, not 1,600 hours as the product manager reported. Why might the product manager of Fruity Bar have understated the number of direct-labor hours used to produce it? (Assume traditional costing is used).