Week 5 Complete assignment
ATC 5-1 (Pg. 246)
(Using ABC to improve product pricing) Answer the four questions posed in the case. Include in your answer the basic differences between volume based (traditional) overhead application procedures and the ABC method.
Case Study
Computation of gross profit margin for each product based on ABC data
(A) Partiulars GS-157 HS-241 OS-367
Selling Price per Unit $19.30 $17.50 $15.10
ABC Cost per Unit $12.50 $11.67 $13.75
Gross Profit per Unit $6.80 $5.83 $1.35
Units Produced and Sold $120,000 $90,000 $40,000
Gross Profit $816,400 $524,700 $54,000
(B) A good example of how ABC systems are better than the traditional costing systems is represented in the case of Hammer Products, Inc. In order to compare them, we first need to calculate the total cost per unit under each costing system, and then determine how much money each product will generate; also known as profit margin per unit. The first step to compute the total cost per unit under the traditional costing system is to determine the predetermined overhead rate that will be used in calculating the manufacturing overhead per unit. As shown in exhibit1, the predetermined overhead rate is obtained by dividing the total estimated manufacturing overhead cost for the year by the total estimated number of hours applied to production. In this case, the predetermined overhead rate turned out to be $48dlh; which means that for every hour spent on the production of these products, $48 will be applied to manufacturing overhead. Once the predetermined overhead rate is determined, we can figure out how much money has been applied to each, single unit of production by multiplying the predetermined overhead rate by the number of direct labor hours that it took to produce each unit. Then, if we add the direct materials and direct labor amounts that were previously given to the manufacturing
(Using ABC to improve product pricing) Answer the four questions posed in the case. Include in your answer the basic differences between volume based (traditional) overhead application procedures and the ABC method.
Case Study
Computation of gross profit margin for each product based on ABC data
(A) Partiulars GS-157 HS-241 OS-367
Selling Price per Unit $19.30 $17.50 $15.10
ABC Cost per Unit $12.50 $11.67 $13.75
Gross Profit per Unit $6.80 $5.83 $1.35
Units Produced and Sold $120,000 $90,000 $40,000
Gross Profit $816,400 $524,700 $54,000
(B) A good example of how ABC systems are better than the traditional costing systems is represented in the case of Hammer Products, Inc. In order to compare them, we first need to calculate the total cost per unit under each costing system, and then determine how much money each product will generate; also known as profit margin per unit. The first step to compute the total cost per unit under the traditional costing system is to determine the predetermined overhead rate that will be used in calculating the manufacturing overhead per unit. As shown in exhibit1, the predetermined overhead rate is obtained by dividing the total estimated manufacturing overhead cost for the year by the total estimated number of hours applied to production. In this case, the predetermined overhead rate turned out to be $48dlh; which means that for every hour spent on the production of these products, $48 will be applied to manufacturing overhead. Once the predetermined overhead rate is determined, we can figure out how much money has been applied to each, single unit of production by multiplying the predetermined overhead rate by the number of direct labor hours that it took to produce each unit. Then, if we add the direct materials and direct labor amounts that were previously given to the manufacturing