FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:
Traditional Costing TRIX
Direct Materials $700
Direct Labour ($20/hour) $120
Manufacturing
Total per unit cost $1, 048
In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics
| Activity cost | Pools | Cost Drivers Estimated | Overhead |
| Expected use of cost drivers | Purchasing number of orders | 1,2000,000 | 40,000 |
| Machine setups | Number of setups | 900,000 | 18,000 |
| Machining | Machine hours | 4,800,000 | 1,20,000 |
| Quality control | Number of inspections | 700,000 | 28,000 |
The cost drivers used:
Cost Drivers TRI-X Product
Purchase orders 17,000
Machine setups 5,000
Machine hours 75,000
Inspections 11,000
Required:
1. Calculate the activity rates for each of the overhead items using the four cost drivers.
2. Using the rates in (1) determine the unit cost for TRI-X.
3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend
whether or not TRI-X should be discontinued.
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