Cost Actg. Review. Cost…an economic sacrifice. Critical Cost Terms. Fixed vs. Variable Product vs. Period Manufacturing vs. Non-manufacturing Direct vs. Indirect Controllable vs. Uncontrollable Opportunity and Sunk Costs Differential Cost and Revenue Cost Drivers FCO’s.
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RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS
B O/H R/M B O/H WIP B O/H F/G
COST OF GOODS
E O/H WIP
COST OF GOODS
E O/H F/G
E O/H R/M
Gulf Stream Recreation, a major sporting goods firm in California has two major
products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead
was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows:
Direct Labor 25 13
Machine Hours 2 1
GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers:
Driver Relationship to FCO
DriverTotal Activity CostTotalRacerCruiserActivity
P.O.'s(#)$300K 2000 1250 750Purchasing
Rework Hrs. (Hrs)$200 450 200 250 Quality Control
Invoices (#)$200 600 150 450 Billing
Change Orders (#)$150 300 150 150 Mfg. Eng.
1.Calculate the unit costs of each product under the traditional method.
2.Calculate the unit costs of each product under activity based costing.
3.What pricing implications are inherent in this example.
Standard Overhead Rate:
$850K/70K Mhrs. = $12.14 per machine hour
Traditional Cost Structure:
ABC Overhead Rate:
Quality control$ 88.9$111.1
Mfg. Engineering$ 75.0$ 75.0
Per unit$40.10$ 8.97
ABC Cost Structure: