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ABC
Siegel Company manufactures a product that is available in a deluxe model and a
regular model. Since the introduction of the deluxe model, the company’s profits have
steadily declined while sales of the deluxe model have been increasing rapidly.
Managers are concerned about the accuracy of its costing system.
Manufacturing overhead is currently assigned to products on the basis of direct labor-
hours (SIMPLE ALLOCATION method). For the current year, the company has
estimated that it will incur €900,000 in manufacturing overhead cost and produce 5, units of the deluxe model and 40,000 units of the regular model. The deluxe model
requires two hours of direct labor per unit, and the regular model requires one hour per
unit. Material and labor costs are as follows:
Deluxe Regular Direct materials/unit € 40 € 25 Direct labor/hour € 7 € 7
Managers are considering using the activity-based costing (ABC) method in order to assign manufacturing overhead costs to products. The ABC system consists of the following four activities and uses direct labor hours as allocation base:
The costs of each activity are allocated to the two products as follows:
Suppose that the selling price of each product is calculated as the total direct cost plus a margin of 100% and that the company can sell all products produced.
Calculate the operating income using absorption costing based on both SIMPLE ALLOCATION and ABC methods and answer questions 1 to 5.
- Using the SIMPLE ALLOCATION method, the amount of manufacturing overheads for the Deluxe product is: A. 90, B. 180, C. 280, D. 560,
Activities Activity allocation bases Estimated direct labor hours Purchasing Purchase orders issued 11,000 hours Processing Machine-hours 10,500 hours Scrap/rework Rework orders issued 15,800 hours Shipping Number of shipments 12,700 hours
Activity allocation bases Deluxe Regular Purchase orders issued 200 400 Machine-hours 20,000 15, Rework orders issued 1,000 1, Number of shipments 250 650
- Using the ABC method, the amount of manufacturing overheads allocated to the Purchasing activity is: A. 189, B. 228, C. 284, D. 198,
- Using the ABC, the amount allocated from the Shipping activity to the Deluxe product is: A. 63, B. 66, C. 108, D. 142,
- Using the ABC, the operating income/loss of the Deluxe product is: A. -46, B. -109, C. 759, D. 924,
- Which of the following statements is TRUE? A. Sales of the Deluxe product increase rapidly because its selling price is much lower than what it should be. B. The Deluxe product has operating loss using ABC method, because it subsidizes the Regular product. C. Siegel Company should use the SIMPLE ALLOCATION method, because it allows both products to have (positive) operating income. D. None of the above statements is correct.
Process
AXY Company produces clogs. The last manufacturing step is carried out in the Drying
and Decorating department. The department transfers in completed clogs from the previous production procedure. At the last step, the following manufacturing activities
are needed to produce finished goods that are ready for sale:
Drying clogs. The transferred in clogs are made with wet wood. They need to be dried first so that in the next step, they can be painted. Wet wood is used in the previous production procedure because it’s easy to form the shape of clogs. Painting and decorating clogs. The dried clogs are painted with different colors and drawings (direct materials). Drying painting. The painting and drawing on clogs need to be dried slowly.
The two drying stages take time. Therefore, at the end of the year, there exists ending
balance of work-in-process inventory for the last manufacturing step.
For year 2013, the company had the following information for the Drying and
Decorating department:
b. 9, c. 8, d. 6,
Department
A company provides two types of services (Service 1 and Services 2) to its clients. There are 5 departments: R&D, Production, Sales, Support Department 1 and Support Department 2. Support departments allocate their costs using reciprocal method. Indirect costs allocated to the departments are as follows:
Departments Costs Allocation Base M^2 Labor Hours R&D $30,000 No. of service performed 35 4, Production $75,000 No. of service performed 90 57, Sales $57,000 No. of service paid 25 12, Support dep. 1 $15,000 Space (M^2 ) 15 34, Support dep. 2 $25,000 Labor hours 37 22,
During the current accounting year, the company has performed 357 times of Service 1 at a price of $180 each, and 543 times of Service 2 at $250 each. However, the company is not paid for all the services performed. During the year, it has been paid for 312 times of Service 1 and for 427 times of Service 2. Please answer questions 1 to 4 based on the above information and Absorption Costing.
- Using reciprocal method, the amount of indirect costs allocated from Support Department 1 to Production department is: a. 8, b. 11, c. 15, d. 22,
- The amount of indirect costs allocated from R&D Department to Service 2 is: a. 21, b. 15, c. 24, d. 22,
- What is the gross margin for Service 1? a. 25, b. 29, c. 24, d. 23,
- What is the operating income for Service 2? a. 17, b. 32, c. 14, d. 15,
