Reference no: EM13552568
Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2012 was as follows.
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Traditional Costing
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Elite
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Preferred
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Direct materials
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$600
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$320
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Direct labor ($20 per hour)
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100
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80
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Manufacturing overhead ($35 per DLH)
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175
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140
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Total per unit cost
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$875
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$540
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In 2012, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 _ $875), and Preferred $560 ($1,100 _ $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the Preferred model. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012.
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Expected
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Activity-
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|
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Use of
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Based
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Estimated
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Cost
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Overhead
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Activity
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Cost Driver
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Overhead
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Drivers
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Rate
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Purchasing
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Number of orders
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$ 775,000
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25,000
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$31
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Machine setups
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Number of setups
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580,000
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20,000
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29
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Machining
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Machine hours
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3,100,000
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100,000
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31
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Quality control
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Number of inspections
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445,000
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5,000
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89
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The cost drivers used for each product were:
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Cost Driver
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Elite
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Preferred
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Total
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Purchase orders
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11,250
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13,750
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25,000
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Machine setups
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11,000
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9,000
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20,000
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Machine hours
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40,000
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60,000
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100,000
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Inspections
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2,750
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2,250
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5,000
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Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound? Explain.
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