FINANCIAL ACCOUNTING
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ISBN: 9781259964947
Author: Libby
Publisher: MCG
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TikTokElectronics 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 2019was as follows:
Traditional Costing TRIX
Direct Materials $700
Direct Labour($20/hour) $120
Manufacturing
Total per unit cost $1,048
In 2019, TikTokElectronics manufactured 26,000units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI-X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTokElectronics
Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Purchasing No. of orders $1,200,000 40,000
Machine setups No. of setups 900,000 18,000
Machining Machine hours 4,800,000 120,000
Quality Control No. of inspections 700,000 28,000
The cost driversused:
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-Xbased on ABC costings and recommend whether or not TRI-Xshould be discontinued.
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