Discuss the value of classifying costs by activity category

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Reference no: EM13949447

Dulce Sound Company produces several different models of a compact disc player system. The company has recently adopted an ABC system. The unit cost expected for the deluxe model, Model FRX, follows:

Unit-level costs (includes materials and labor) $120
Batch-level costs 80
Product-level costs 40
Facility-level costs 20
Total unit cost $260

The unit cost is based on an expected volume of 20,000 units. These units will be produced in 20 equal batches. The product-level costs are all from engineering sup- port. The product-level costs are driven by engineering orders. The $40 cost assign- ment is based on 10 orders. Facility-level costs are allocated on the basis of direct labor hours (one hour per unit produced).

Required

1. Calculate the total manufacturing cost to produce 20,000 units of the deluxe model. Present the total cost for each activity category.

2. Now assume that the company has revised its forecast for the deluxe model and expects to produce 30,000 units. A decision was made to handle the increased production by increasing batch size to 1,500 units. The increased production will not require an increase in engineering support. Calculate the total cost to produce the 30,000 units of the deluxe model. Present the total cost for each activity category. Explain the outcome.

3. Assume that the revised forecast of 30,000 units is made. Now, however, the decision is made to handle the extra production by increasing the number of batches from 20 to 30. Also, the sale of the extra 10,000 units is possible only if an engineering modification is made. This increases the expected engineering orders from 10 to 12. Explain why the costs changed from those predicted in Requirement 2.

4. Discuss the value of classifying and reporting costs by activity category.

Reference no: EM13949447

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