Activity-Based Costing (ABC) Homework

Variable cost

Milk

Premium

and volume data

chocolate

cacao

Raw materials

0.50

0.75

Direct labor

0.25

0.40

Selling and general

0.05

0.05

Volume in units

300,000

100,000

Sells price / unit

2.65

4.99

Production hours/unit

same

same

ABC

Indirect

Factory

Depreciation:

Repairs &

Selling and

General

Cost

manufacturing

Insurance &

Machinery

maintenance

distribution

& admin.

Pools

labor

Utilities

& factory

factory

expenses

expenses

Totals

Product Development

25,000

25,000

Setup Candy Molding Equip

12,000

18,500

30,500

Equipment Operations

15,500

31,500

20,000

10,000

77,000

Shipment Preparation

20,000

20,000

Distribution

4,000

4,000

Administration

20,000

60,000

80,000

Totals

52,500

31,500

38,500

14,000

40,000

60,000

236,500

ABC cost

Milk

Premium

allocation percentages

chocolate

cacao

Product development

20%

80%

Setup candy molding equipment

60%

40%

Equipment operations

75%

25%

Shipment preparation

70%

30%

Distribution

65%

35%

Administration

50%

50%

1. Compute the total overhead, total cost, and per unit cost of each product, under the simple/traditional costing method and under the Activities-Based Costing (ABC) method.

2. Compute and compare the net operating profit margin of each product using the simple/ traditional costing method and using the ABC method.  Evaluate the difference.

3. Categorize the production activities under activity-based costing according to the cost hierarchy and indicate the type of cost category that aligns with the activity.

4. Write a brief explanation (approximately two paragraphs) that you might deliver to management to justify the use of ABC for these two products.