Traditional Overhead Allocation and Activity-Based Costing: Cost Analysis

Traditional Overhead Allocation and Activity-Based Costing: Cost Analysis

Question

Cost Analysis for a Manufacturing Company Using Activity-Based Costing and Traditional Overhead Allocation

Company X is a manufacturing company. His two products manufactured for the company, the C1 and the T1, appear to be unprofitable despite the company’s high sales volumes. Upon further analysis of the numbers, the finance chief noted that overhead as a percentage of total costs has increased over the past five years. His CEO at the company recently heard about a new method of costing products that uses activity-based costing to allocate overhead costs. The company currently allocates a total company overhead of EUR 2,400,000 based on a preset overhead rate based on total machine hours. The CEO wants to launch a project that allocates these overheads based on activity. As a first attempt, it was decided to use activity-based costing to distribute the overhead costs over the two products C1 and T1.

The following information was provided for production work:

Overhead typeActivityTotal
Set up600,000Number of set up hours8,000
Maintenance400,000Number of Machine hours200,000
Quality Inspection800,000Number of inspections200,000
Assembly600,000Number of Labour hours100,000


Here are the unit prices for the two products

C1T1
Direct Material350480
Direct Labour300500


Activity usage information for each product is below

C1T1
Direct labour hours per unit1525
Machine hours per unit9030
Set up hours per unit23

Provide the following information:

Use the calculator to display the unit price of C1 and T1 in the traditional way and add a 60% markup to calculate the selling price for each. (Assuming machine time is used to allocate overhead costs.) (10 points)

Using activity-based costing to display unit prices for C1 and T1 and add a 50% markup to calculate the selling price. in any case. (25 points)

Provide a note to the manager explaining the differences between activity-based costing and traditional flat-rate overheads. It compares the results of both overhead allocation methods and recommends which overhead allocation method to use. Please support your answer with a reason. (15 marks)

Company Y is a subsidiary of the company The following budget information is available:

Direct Material  €10 Per unit
Direct Labour  €15 per unit
Variable production  Overhead  €3 per unit

Fixed production overhead of €2,000 per month, based on budgeted production The calculated monthly absorbed quantity is 1,000 units.

Fixed sales and distribution costs are budgeted at €2,500 per month.

Fixed costs are assumed to be evenly distributed throughout the year.

The sales price is planned at 70 euros per piece.

Actual costs and selling prices are in line with the budget for the first two months of production.

There was no starting stock. July.

The next dates are in 2022 he’s July and he’s August.


July
August
Sales (units)9001,000
Production (units)1,1001,000

Create a schedule that calculates opening and closing inventories. (5 points)

Produce an income statement using the total cost accounting for July and August. (15 marks)

Produce income statement with marginal costing (variable) for July and August. (15 points)

Adjust the difference between the variable cost profit and the absorption cost profit. (5 pts)

Explain the discussion of absorption costing and variable (marginal) costing. (10 points)

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