Fantori Ltd has been in business for few 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 dont 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, Tony Mans 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 its time.
The following information has been supplied to you regarding the business for the year 2017.

Basic Model 
Units produced and sold: 1700
Direct material cost per unit: $350
Direct Labour cost per unit: $175

Advance Model 
Units produced and sold: 1600
Direct material cost per unit: $580
Direct labour cost per unit: $280

 

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

 

Inspection: $30 000

Assembly: $100 000

Production Scheduling: $110 000

Machine set-up: $40 000

 

The models use the activities in the following ways:

 

Basic Model                                     Advance Model

Inspection                            210                                                     760    Inspections

Assembly                              4700                                                  3500              machine hours

Production scheduling      60                                                       510     Runs

Machine set-up                   120                                                     270     set up

 

Other operating expenses for the advance model are: selling and administration $300 200, interest expense $40 500 and office rent $42 800.

 

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 total cost (under the current costing system) plus 30% 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. Discuss why actual overhead and applied overhead may be different at year end state three ways to deal with under/over applied overhead costs (no journal entries are required).
  5. Assume actual overhead is $300 000 and applied overhead is $210 000 and also assume that at the end of the year the inventory and the cost of goods sold accounts are as follows:

Work-in-process: $60 500

Finished goods: $90 000

Cost of goods sold is $1 850 000

 

Calculate the under/over applied overhead and using the proration method dispose the under/over applied overhead (no journal entries are required).

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