Classic Pen Case

ACCT500_ET - MANAGERIAL DECISION SUPPORT

Classic Pen Case

With all the information we had we calculate the cost per product with the ABC Method. We decided to use the absorption cost as we include fixed overhead cost in establishing our product cost.

The fringe benefits are split between the direct and the indirect labor expenses. With the information we can deduce than $8,000 will be affected as fringe direct labor and the other $8,000 are include in the direct labor.

The indirect labor is split in 3: 50% in production, 40% of setup time and 10% in part of administration. It gives the following result:

Computer systems are then split in two: 80% in production runs and 20 % in part of administration.

Machine Hours=$14,000/10,000=$1.4

$14,000=$8,000+$4,000+$2,000. The $14,000 represent the last three categories of the table: machinery, maintenance and energy. We noticed that 10,000 machine’s hours were allocated.

Repartition of indirect costs

Cost Driver Cost Pool Total Number of Activities Allocation Rate

Machine Hours $ 14 000 10 000 1.4

Production Runs $ 22 000 150 146.67

Setup Hours $ 11 200 526 21.29

Parts Admin $ 4 800 4 1 200

Fringe direct Labor Hours $ 8 000 2 000 4

Total $ 60 000

Repartitions of the MOH through the ABC method

Cost drivers Formula Blue Black Red Purple Total

Machine Hours Machine hours/units * Volume of Sales * Allocation rate $ 7 000.00 $ 5 600.00 $ 1 260.00 $ 140.00 $14 000.00

Production Runs Production runs * Allocation rate $ 7 333.33 $ 7 333.33 $ 5 573.33 $1 760.00 $22 000.00

Setup Hours Total setup time * Allocation rate $ 4 258.56 $ 1 064.64 $ 4 854.75 $1 022.05 $11 200.00

Parts Admin Parts administration * Allocation rate $ 1 200.00 $ 1 200.00 $ 1 200.00 $1 200.00 $ 4 800.00

Direct Labor Hours Direct labor hours/unit * Volume of Sales * Allocation rate $ 4 000.00 $ 3 200.00 $ 720.00 $ 80.00 $ 8 000.00

Total Manufactured Overhead cost $23 791.89 $ 18 397.97 $ 13 608.09 $4 202.05 $60 000.00

Now we have our costs driver and their allocation rate, we are able to compute the manufacturing overhead cost per product.

We were able to compute our Manufacturing Overhead cost of each product. Then, we have to calculate also the Direct Material Cost and the Direct Labor in order to obtain the total manufacturing cost per product.

Direct Costs and Activity Cost Drivers

Blue Black Red Purple Total

Material cost $ 25,000 $ 20,000 $ 4,680 $ 550 $ 50,230

Direct Labor Hours 1,000 800 180 20 2,000

Material costs=Material unit cost×Production Sales Volume

Direct Labor Hour=$20,000/2,000=$10

As we noticed a total of 2,000 hours for the production of our 4 pens and a total cost of $20,000, the cost of one direct labor hour is $10.

ABC method Income statement

Blue Black Red Purple Total

Sales $ 75 000.00 $ 60 000.00 $ 13 950.00 $ 1 650.00 $ 150 600.00

Material cost $ 25 000.00 $ 20 000.00 $ 4 680.00 $ 550.00 $ 50 230.00

Direct Labor $ 10 000.00 $ 8 000.00 $ 1 800.00 $ 200.00 $ 20 000.00

MOH $ 23 791.89 $ 18 397.97 $ 13 608.09 $ 4 202.05 $ 60 000.00

Total Manufacturing Cost $ 133 791.89 $ 106 397.97 $ 34 038.09 $ 6 602.05 $ 280 830.00

Operating income $ 16 208.11 $ 13 602.03 $