I’m studying for my Accounting class and need an explanation.
Q1. ABC Corporation makes three types of products and currently uses traditional product costing system.The management is considering using activity based costing. Below is the details on the tree products
| Products |
Labor hour per unit |
Machine hours per unit |
Material cost per unitSR |
Volume of productions
(Units) |
| Product A |
1.5 |
0.5 |
20 |
1,000 |
| Product B |
1 |
1.5 |
25 |
5,000 |
| Product C |
0.5 |
1.0 |
30 |
1,500 |
Total manufacturing overhead are SR 750,000. In- depth analysis for overheads has been done to apply activity based costing as follows:
| Activities |
Activity’s Overheads cost pool |
| Set- ups |
150,000 |
| Machinery |
200,000 |
| Material handling |
125,000 |
| Inspection |
275,000 |
| Total |
750,000 |
The actual quantity used of activities by products as follows:
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| Products |
Set- ups |
Machinery (hours) |
Material handling |
Inspection |
| Product A |
100 |
500 |
15 |
20 |
| Product B |
120 |
7,500 |
30 |
150 |
| Product C |
300 |
1,500 |
90 |
700 |
| Total |
520 |
9,500 |
135 |
870 |
Direct labor rate is SR 5 per hour and overhead allocated to products under traditional costing system using machine hour as allocation base.
Required:
- Calculate cost per unit per each product under traditional costing system.
- Calculate cost per unit per each product under activity based costing.
- Comment on results.
Q2. In 2020, ABC Company produces a single product with the following information:
| Variable cost per unit: |
SR |
| Direct martial PER UNIT |
8 |
| Direct labor per unit |
10 |
| Manufacturing over head |
5 |
| Variable selling expense per units sold |
2 |
| Additional information: |
SR |
| Fixedmanufacturing costs per year |
150,000 |
| Fixedselling and administrating expenses per year |
150,000 |
| Number of units produced |
20,000 |
| Selling price per unit |
50 |
Required:
- Prepare income statement using absorption costing and variable costing assuming all 20,000 units sold.
- Prepare income statement using absorption costing and variable costing assuming all 15,000 units sold and 5,000 units unsold.
- Comment on results explaining which costing method produces more profit in case of inventory.
