St Mary’s University School of Graduate Studies, MBA Gr ✓ Solved

Compute: A. Prime cost B. Total FOH cost C. Conversion cost D. Production cost (mfg) E. Direct cost F. Indirect cost. AXY Company produces two products, the ABB and the ACC. The ABB is a high-volume item totaling 50,000 units annually. The ACC is a low-volume item totaling only 10,000 units per year. Each product requires 4 hours of direct labor for completion. Therefore, total annual direct labor hours are 240,000. Expected annual manufacturing overhead costs are $1,600,000. The cost allocation base is direct labor hour. The direct materials cost per unit is $80 for the ABB and $60 for the ACC. The direct labor cost is $24 per unit for each product. AXY Company’s expected annual overhead costs of $1,600,000 relate to two activities—machine setups, machining. Activity Cost Driver Total expected overhead cost Total expected use of driver Machine setup Number of setup $600, Machining Machine hours 1,000,000. Required: a. Allocate overhead cost in traditional costing system and ABC costing system. b. Determine unit cost under traditional costing and ABC costing system and comment on it. Data related to expected sales of a Products for ABC Inc. for the current year is follows: Products Unit Selling Price Unit Variable Cos Automobile ETB 200,000 ETB 160,000. The estimated fixed costs for the current year are ETB 20,000,000. Instructions: a) Determine the estimated units of sales of the product necessary to reach the break-even point for the current year. b) Assume the company targets income before tax ETB 4,000,000. Calculate total units to be sold to achieve target profit.

Paper For Above Instructions

Accounting and finance play a critical role in the management of organizations. This paper will analyze a series of financial exercises based on the information provided about AXY Company, a Bike manufacturer, and ABC Inc. The key financial metrics, such as prime costs, overhead costs, conversion costs, production costs, and break-even analysis will be systematically computed and examined.

Part 1: Cost Analysis for AXY Company

The first part requires calculating various costs associated with AXY Company’s production of two products: ABB and ACC. To compute the costs, we follow the definitions provided in financial accounting.

A. Prime Cost

The prime cost refers to the direct costs attributable to the production of goods, which includes direct materials and direct labor.

  • For ABB:

    • Direct Material Cost: $80/unit

    • Direct Labor Cost: $24/unit

    • Total direct cost for 50,000 units: (50,000 * ($80 + $24)) = $5,200,000

  • For ACC:

    • Direct Material Cost: $60/unit

    • Direct Labor Cost: $24/unit

    • Total direct cost for 10,000 units: (10,000 * ($60 + $24)) = $840,000

Total Prime Cost = $5,200,000 + $840,000 = $6,040,000

B. Total FOH Cost

The total factory overhead (FOH) cost is given as $1,600,000. This is the total amount allocated for overhead expenses to all production activities of AXY Company.

C. Conversion Cost

Conversion costs include direct labor and manufacturing overhead costs. Therefore:

Conversion Cost = Direct Labor Cost + Total FOH Cost = $1,920,000 (for both products) + $1,600,000 = $3,520,000

D. Production Cost (Manufacturing Cost)

The total manufacturing cost combines the prime cost and factory overhead:

Production Cost = Prime Cost + Total FOH Cost = $6,040,000 + $1,600,000 = $7,640,000

E. Direct Cost

Direct costs refer to those costs that can be directly traced to the production of a specific product. In this case, both material and labor costs are considered direct costs:

Direct Cost = Total Direct Materials + Total Direct Labor = $6,040,000

F. Indirect Cost

Indirect costs refer to overhead costs that cannot be directly traced to specific products. The total FOH represents the indirect costs, which are:

Indirect Cost = $1,600,000

Part 2: Cost Allocation for AXY Company

The next step is to allocate overhead costs based on traditional costing and activity-based costing (ABC) methods.

Using direct labor hours as the allocation basis, the overhead allocation is calculated as follows:

Overhead Rate = Total Expected Overhead Costs / Total Direct Labor Hours = $1,600,000 / 240,000 hours = $6.67/hour

For the ABC costing method, we will allocate the costs based on activity drivers.

Using the number of setups and machine hours, we calculate overhead per product. The setup costs are $600 and total machine hours are allocated based on units manufactured.

Unit Cost Determination

To determine the unit cost using traditional and ABC systems for ABB and ACC:

  • ABB traditional costing unit cost = ($80 + $24 + 6.67 * 4 hours) = $80 + $24 + $26.68 = $130.68

  • ACC traditional costing unit cost = ($60 + $24 + 6.67 * 4 hours) = $60 + $24 + $26.68 = $110.68

Part 3: Decision Making for Bike Manufacturer

The cost analysis for the Bike manufacturer shows that the variable costs and depreciation allocations lead to a total unit cost of $25. Comparatively, the outside supplier offers the part at $20 each, saving $5 per part. However, it is essential to consider whether accepting this offer could impact quality, control, and flexibility in production. Given that the special equipment has a resale value of $20,000, continuing production while keeping the equipment would be advantageous unless operational capacity diminishes significantly.

Part 4: Break-even Analysis for ABC Inc.

To determine the break-even sales units for ABC Inc., we can calculate as follows:

Fixed costs = $20,000,000

Unit Selling Price = $200,000

Unit Variable Cost = $160,000

Contribution Margin per Unit = Selling Price - Variable Cost = $200,000 - $160,000 = $40,000

Break-even Point (Units) = Fixed Costs / Contribution Margin per Unit = $20,000,000 / $40,000 = 500 units

For the target income of $4,000,000:

Total Units to Achieve Target Profit = (Fixed Costs + Target Profit) / Contribution Margin = ($20,000,000 + $4,000,000) / $40,000 = 600 units

Conclusion

The analysis indicates that thorough computation of production costs, direct and indirect costs, along with examining profitability such as break-even points, enable effective decision-making in a business context. These metrics are crucial for understanding the effective allocation of resources and maximizing profitability.

References

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