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Cost per unit under ABC & traditional costing
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Module 4 - Case
Activity Based Costing
The New Millenium Manufacturing Company produces two products. One is a millenium surf kit. The other product is a professional surf-board (short board) used in world class surfing competition. Most of the sales come from the millenium surf product, but recently sales of professional boards have been increasing. The following information relates to the products for the most recent fiscal year:
Millenium Surf Kit Professional Board
Sales and production (units) 1500 500
Sales price $980 $650
Labor hour required per unit 6 9
Machine hour required per unit 5 8
Unit costs:
Direct materials $212 $265
Direct labor $85 $85
Variable overhead $70 $90
Concerning the current system`s effectiveness in valuing costs of two products, Millenium Manufacturing Company hires a consultant to create an activity-based costing system. The consultant developed the following data:
Cost pool Cost driver Tot. amount Surf Kit Prof. Board
Equipment Machine hours $ 90,000 7,500 4,000
Material order No. of orders 33,000 150 475
Machine setups No. of setups 30,600 70 216
Quality control No. of insp. 58,000 5 25
Required:
1. Calculate the manufacturing overhead rate based on labor hours and machine hours (two separate computations).
2. Determine the cost to manufacturing one unit of each model using two different traditional approaches; direct labor hours and machine hours.
3. Determine the cost to manufacturing one unit of each model using the activity-based costing data presented above.
4. Is the millenium surf kit as profitable as the company may think it is based on its present system?
5. What should Millenium Manufacturing Company do to improve its profitability?