machine hours as an allocation base

Haze Busters is a manufacturer of air purifiers systems in Singapore. It produces two types of air purifiers. The basic model is meant for home use whereas the enhanced model is meant for commercial use.

 

At present its overhead costing system allocates indirect cost to products using machine hours as an allocation base. However, the Chief Accountant of the company has decided to introduce an Activity Based Costing system in a bid to improve overhead allocation to the products.

 

The direct cost incurred for the units produced last year was as follows:

 

  Basic Enhanced
  $ $
Units 10,000 3,000
Direct Material 1,000,000 600,000
Direct Labour 400,000 135,000

 

The Basic unit was priced at $564 and the Enhanced at $980 per unit. The company’s sales policy require that each product achieve a minimum profit margin of 35%.

 

The following data have been collected for all indirect cost:

 

Activity Annual cost
  $
Quality Inspection 800,000
Set-up Cost 650,000
Container Shipping 300,000
Stores Handling cost 50,000
Factory Overheads 1,500,000
Total 3,300,000

 

The following data has also been collected by the research team involved in implementation of the ABC system.

  Total Basic Enhanced
Number of inspections 10,000 2,000 8,000
Number of set-ups 500 100 400
Number of Handling Hours      
(Stores) 32,000    

 

Each 40 foot container used can load 200 basic units or 150 enhanced units.

 

Each Basic unit requires 2 handling hours in the Stores. Basic requires 2 machine hours to produce whereas the Enhanced requires 3 machine hours to produce.

 

Required:

 

  1. a)Compute the gross profit per unit for both products using the single indirect cost pool method. (5 Marks)

 

  1. b)Prepare a schedule calculating the unit cost and gross profit per unit of both products using an activity based costing approach. (10 Marks)

 

  1. c)Based on the ABC results, what course of action should the management of Haze Busters Ltd take? (5 marks)

 

  1. d)Based on the results in a) and b) and the information given, would you recommend that the company introduce the ABC system. Provide the reasons for the recommendation. (5 marks)

 

Answers to part a) and b) should be rounded to the nearest dollar.