Capital Budgeting and Cost of Capital
iuca05r6cq
project_3_cost_allocation_step_1-3.pptANDROID01
COST ALLOCATION
ALLOCATE COSTS
A. Factory Space Allocation Method
B. Labor Allocation Basis
Factory Space Allocation:
The total cost per unit of producing Android01 using this method will involve apportioning the variable cost of production using the total factory space as per figure A. By dividing the $6,000,000 variable cost by the 300 units Android01 produced, we obtain a variable cost per unit of $ 20,000. Variable cost of components amounts to $25,000 per unit while 30% of total fixed cost amounts to $1,500,000 which when allocated to 300 units of Android01 amounts to $5,000 per unit. The total cost using the factory space allocation method will be $50,000.
Labor Allocation Basis:
Per figure B, the total cost per unit of producing Android01 using this method will involve apportioning the variable cost of production using the total factory space. By dividing the $8,000,000 variable cost by the 300 units of Android01 produced we obtain a variable. Variable cost of components amounts to $25,000 per unit while fixed cost per unit is $5,000. The total cost using the labor space allocation method will be $56,666.70.
Recommendations.
I would recommend the use of the labor allocation method since it results to a higher cost allocation to Android01 compared to the factory space. This would prevent under costing of the Android01 product resulting in the company selling the product at a loss.
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ACTIVITY BASED COSTING
The total cost per unit of producing Android01 using the Activity Based Costing method will involve apportioning the variable cost of production ($25,000,000) using the major activity of production which is component assembly. Android01 requires 180 assemblies for each unit thus producing 300 units will require54,000 assemblies (300*180) out of the total 125,000 assemblies in the factory. The allocation is reflected on line 8 and 9 of the spread sheet above.
By dividing the $10,800,000 variable cost by the 300 units of Android01 produced we obtain a variable cost per unit of $ 36,000. By combining it with the component unit cost of $25,000 the total cost using activity based costing will be $61,000.
Recommendations.
I would recommend the Activity Based Costing method for IPS over the factory and labor cost allocation method since it uses the major activity to apportion the variable costs and thus more accurate in terms of costing.
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MARKUP PRICING
IPS company applies a 30% mark-up on full cost in pricing its products and incurs a fixed cost of $4,500,000 on Android01 which when spread to 300 units will result in a fixed cost of $15,000. The fixed cost per unit is added to the variable cost per unit of $48,0000 resulting in a full cost of $63,000 for each unit of Android01. A markup of 30% on this cost will amount to $18,900. When added to the full cost of $63,000 the price of Android01 will be $81,900.
The mark-up pricing method is very beneficial to the company since it takes into consideration the full cost of production of the unit in calculating the mark-up . This pricing method will ensure that profits are calculated in such a way that the company can cover its costs to break-even and also make profits above the costs.
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