Reference no: EM132715716

Activity- Based CostingCase:

Fremont Systems produces two different products, Product A, which sells for $1,000 per unit, and Product B, which sells for $2,000 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows:

                                     Cost       Usage by Product A      Usage by Product B

Design                  $ 1,500,000                    400                   600

(Engineering Hrs.)

Machining                $ 5,000,000                2,000                 6,000

(Machine Hrs.)

Inspection                $ 300,000                     90                  30

(Batches)

Fremont manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each unit of Product A uses $500 of direct materials and $200 of direct labor, while each unit of Product B uses $750 of direct materials and $350 of direct labor.

Required:

Problem 1. Using ABC, determine the manufacturing cost per unit of Products A and B.

Problem 2. Based on your answers on (1), assume that all units produced are sold during the current month, calculate the company's gross profit.

Problem 3. Using traditional volume costing with machine hours as the cost driver, determine the manufacturing cost per unit of Products A and B.

Problem 4. Based on your answers on (3), assume that all units produced are sold during the current month, calculate the company's gross profit.