Sewing Easy Ltd has been in business for two years manufacturing sewing machines. It currently manufactures two models, the basic and advance. Last year, 2017 they made good profit and they were happy their business is running well. They are about to enter a new phase in their business, selling to an overseas buyer. However, they are a bit confused as to why the buyer is only interested to buy the advance model and not the basic or both. For product costing purposes the business uses the traditional costing system and machine hours to assign indirect cost to the sewing machines as they are fairly new in business and don’t want to spend too much money to implement a more refined costing system-they are making profit, why change things?


However, the owner of the business, Sam Moroney is a bit concerned as to the reason why the overseas buyer is not interested in buying the basic model and has appointed you to get to the bottom of this. He had been advised by fellow business buddies to implement Activity Based costing from the beginning but ignored it. He is thinking maybe it’s time.


The following information has been supplied to you regarding the business for the year 2017.


Basic Model

Units produced and sold: 1600

Direct material cost per unit: $325

Direct Labour cost per unit: $150


Advance Model

Units produced and sold: 1500

Direct material cost per unit: $560

Direct labour cost per unit: $260


The total indirect/overhead costs and activities are as follows:


Inspection: $20 000

Assembly: $90 000

Production Scheduling: $105 000

Machine set-up: $35 000


The models use the activities in the following ways:


Basic Model                                     Advance Model

Inspection                            200                                                     750    Inspections

Assembly                              4600                                                  3400              machine hours

Production scheduling      50                                                       500     Runs

Machine set-up                   100                                                     250     set up


Other operating expenses for the advance model are: selling and administration $140 600, interest expense $25 200 and office rent $35 900.


Required: Calculations in two decimal places

  1. Calculate cost per unit of the two models of sewing machines under the current traditional costing system.
  2. Calculate cost per unit of the two models of sewing machines under Activity based Costing.
  3. Sewing easy sells the advance model at a price of cost (under the current costing system) plus 20% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a) traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.
  4. Seldom will we see that the actual overhead and applied overhead is the same. Discuss why and state three ways to deal with under/over applied overhead costs.
  5. What are the main benefits and limitations of ABC system?

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