Case 5 - 69

Topics: Activity-based costing, Costs, Cost Pages: 8 (966 words) Published: January 27, 2014
Case 5 – 69
1.0 Compute the target prices for the three models, based on the traditional, volume-based product costing system.

The volume based product costing system comprises the total product cost multiplied by a target selling price. The target selling price in a volume based product costing system can differ from an activity based product costing system because of the way the manufacturing overhead costs are lumped together and applied on the basis of direct-labour hours over all three products.

Standard Model
Deluxe Model
Heavy-Duty Model
Total Product Cost
$105
$215
$232
Target Price Multiplier
110%
110%
110%
Target Selling Price
$115.50
$236.50
$255.20

2.0 Computer new product costs for the three products, based on the new data collected by the controller. Round to the nearest cent.

Using the data the controller has compiled we can now separate the manufacturing overhead costs over the three products to give us a more accurate total product cost. I will be working out the overhead costs based on the activity cost pools given in the case study.

Pool 1: Machine Time
Item
Total
Machine Depreciation
$1,480,000
Machine Maintenance
$120,000

$1,600,000

Model
Calculation
Total
Standard
($1,600,000 * 0.4) / 20,000 Units
$32.00
Deluxe
($1,600,000 * 0.13) / 1,000 Units
$208.00
Heavy-Duty
($1,600,000 * 0.47) / 10,000 Units
$75.20

Pool 2: Engineering Hours
Item
Total
Engineering
$350,000
Inspection and Repair of Defects
$375,000

$725,000

Model
Calculation
Total
Standard
($725,000 * 0.47) / 20,000 Units
$17.04
Deluxe
($725,000 * 0.06) / 1,000 Units
$43.50
Heavy-Duty
($725,000 * 0.47) / 10,000 Units
$34.08

Pool 3: Number of Material Orders
Item
Total
Purchasing, Receiving and Shipping
$250,000
Material Handling
$400,000

$650,000

Model
Calculation
Total
Standard
($650,000 * 0.47) / 20,000 Units
$15.28
Deluxe
($650,000 * 0.08) / 1,000
$52.00
Heavy-Duty
($650,000 * 0.45) / 10,000
$29.25

Pool 4: Factory Space Usage
Item
Total
Depreciation, Taxes and Insurance for Factory
$300,000
Miscellaneous Manufacturing Overhead Costs
$295,000

$595,000

Model
Calculation
Total
Standard
($595,000 * 0.42) / 20,000
$12.50
Deluxe
($595,000 * 0.15) / 1,000
$89.25
Heavy-Duty
($595,000 * 0.43) / 10,000
$25.59

New Product Cost’s

Standard Model
Deluxe Model
Heavy- Duty Model
Direct Materials
$10.00
$25.00
$42.00
Direct Labour
$10.00
$20.00
$20.00
Manufacturing Overheads

Machinery (Pool 1)
$32.00
$208.00
$75.20
Engineering (Pool 2)
$17.04
$43.50
$34.08
Materials/Handling (Pool 3)
$15.28
$52.00
$29.25
Factory/Miscellaneous (Pool 4)
$12.50
$89.25
$25.59
Product Cost
$96.82
$437.75
$226.12

3.0 Calculate a new target price for the three products, based on the activity-based costing system. Compare the new target price with the current actual selling price for the standard-model electric motor.

The current selling price of the standard electric motor is $110 which is based off the old target price using the Volume- Based Product Costing System. Using the new target price based off the Activity- Based Costing System, Morelli Electric Motor Corporation can sell the standard electric motor at a 10% mark up from production cost for $106.50 which is now in line with competitors selling at $106.

Standard Model
Deluxe Model
Heavy-Duty Model
Product Cost Based on Activity-Based Costing System
$96.82
$437.75
$226.12
Target Price Multiplier
110%
110%
110%
New Target Price
$106.50
$481.53
$248.73
Old Target Price Based on Volume-Based Product Costing System $115.50
$236.50
$255.20

4.0 Write a memo to the company president explaining what has been happening as a result of the firm’s traditional, volume-based product-costing system.

Morelli Electric Motor Corporation
Memo
To:
President of Morelli Electric Motor Corporation...
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