Due : Week 10

Jackson Ltd manufactures two products  FRED and MARTHA  .The firm uses a single plantwide overhead rate based on direct labour hours .Product costing data is as follows:
FRED                         MARTHA
Production Quantity                                                                1000 units               5000 units
Direct material                                                                           $40                          $60
Direct labour                                                                               30(2 hours)             45 ( 3 hours)
Manufacturing overhead                                                          96( 2 hours)          144 ( 3 hours)
Total cost per unit                                                                    $166                        $249
Manufacturing overhead is currently  calculated by using a conventional volume based approach using a predetermined overhead rate based on the number of direct labour hours used to produce the product.The manufacturing overhead budget consists of the following overhead costs:
Machine related  costs                                                   $450,000
Setup and inspection                                                         180,000
Engineering                                                                            90,000
Plant related costs                                                                96,000
Total                                                                                     $816,000

Currently Jackson prices its products at 120% of total manufacturing cost .It has noticed that a competitor is producing MARTHA and has been pricing its products at $230 each and that sales of MARTHA have been declining over the last year.Because of this the accountant at Jackson has suggested that Activity Based costing should be considered .He suggested the following details
Activity Cost Pool                    Cost driver                                   Budgeted level
Machine related costs            Machine hours                             9000 hours
Setup and inspection              Number of production runs      40 runs
Engineering                               Engineering change orders       100 change orders
Plant related costs                   Square footage of space            1,920  sq ft.

You have gathered some further information about the two products :
Each FRED requires 4 machine hours, whereas each MARTHA requires 1 machine hour.
The FRED is manufactured in production runs of 50 units each .Each MARTHA is manufactured in 250 unit batch
Three quarter of the engineering activity ,in terms of change orders ,is related to FREDs
The plant has 1,920 square feet of space, 80 per cent of which is used in the production of FREDs

(a) Calculate the cost per unit for FREDs and MARTHAs using the conventional approach when calculating overhead
(b) Calculate the cost per activity for each activity cost pool
(c) Calculate the product cost per unit for FREDs and MARTHAs using Activity Based Costing.
(d) Using the same pricing approach as above(120% of total manufacturing cost) calculate the price that would be charged for FREDs and MARTHAs using Activity Based costing.
(e ) Based on your calculations using Activity Based costing explain how the conventional volume based approach to allocating overhead has lead to mispricing the products.
(f) What are the benefits that would come from  introducing Activity Based costing(ABC)?
(g) Are there any disadvantages from using ABC ?

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