Ali's Kitchen company will manufacture three kitchen set products with three models, namely regular (REG), Advanced (ADV) and Gourmet (GMT). Previous work on a kitchen set used a job-order product-costing system, with manufacturing overhead charged based on direct-labor hours. The following data is a cost charging based on the traditional costing system: (on picture)
The annual budget for overhead costs is $ 1,224,000, and the company determines a predetermined overhead rate of $ 12 per direct-labor hour. The costs of using the traditional costing system when using the kitchen set are as follows: (on picture)
Ali's Kitchen's pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other equipment manufacturers, a REG unit is selling for $ 525, and an ADV unit is selling for $ 628. This price is somewhat below the company's target price. However, this result was partially offset by the bigger-than-expected gain in the GMT product line. Management has raised the price on the GMT model to $ 800, which is higher than the original target price. Even at these prices, Ali's Kitchen customers don't seem to hesitate to place an order. In addition, the company's competitors are not challenged in the market for the GMT product line. However, concerns are growing in Toledo about the difficulties in the REG and ADV markets. After all, this is a factory-based bread and butter product, with projected annual sales of 5,000 REG units and 4,000 ADV units.
Ali's Kitchen's director of cost management, Rahmad, has been thinking for a long time about improving the product cost system at this factory. Rahmad wonders if the traditional, volume-based system provides accurate data management on product costs. He had read about activity-based costing, and wondered if ABC would be an upgrade to the factory product scoring system. After some discussion, an ABC proposal was made to top management of the company, and approval was obtained. The data collected for the new ABC system is shown in the following table. (on picture)
1. Prepare a table, which compares overhead costs, total product costs, and target prices for each product line under two alternative costing systems.
2. Are each of the three Kitchen King product lines over-cost or low-cost? What is the price per unit?
Extracted text: Cost Driver Quantity for Product Line Activity Shipping 66,000 Shipments REG 500 Activity Cost Pool Cost Driver Product Line ADV 400 Machine related Machine Hous GMT 200 $310,500 REG 50,000 Total 1100 ADV 45,000 GMT 17.000 32,500 REG 250 Hours Total 115.000 ADV 200 Material Sandling 52,500 Production Rues REG 40 GMT 200 Total 650 ADV 40 GMT 20 Facility S75,000 Machine Hous REG 50,000 ADV 45,000 Total 100 GMT 17.000 Parchasing 75,000 Parchase Orders REG 100 Total 115.000 ADV 96 GMT 104 Total 300 Setup Production Rues $5,000 REG 40 ADV 40 GMT 20 Total 100 Inspection 27,500 Iaspection Hours REG 400 ADV 400 GMT 300 Total 1100
Extracted text: REG ADV GMT PlannedAnnual Production Volume in units 5.000 4.000 1.000 Productionruns 40 runs of 125 40 runs of 100 units 20 runs of 50 units units Direct Material $129 $151 $203 $171 (9hrs @19 perhr) $209 (11 hrs @$19 $247 (13hrs @19. perhr) Direct labor (Not including setup) Machine Hours (MH) Perhr) 10 MH 12 MH 17 MH Totalmachine hours consumed by product line in a year 50.000 (10 MHx 48.000(12 MHx 5.000) 17.000 (17 MHx 1.000) 4.000) The annual budget for overhead costs is $1,224,000, andthecompany detemines a predeteminedoveheadrate of $ 12 per direct-laborhour. The costs ofusing the tra ditional costing systemwhen using thekitchenset are as follows: REG ADV GMT Direct Material $129 $151 $203 $171 (9hr @$19) $247 (13hr @$19) Direct labor (not including set-up time) Manufacturing $209 (11hr @19) $108 (9hr @12) $132 (11hr@12) $156 (13 hr@12) overhead Total $408 $492 $606