Reference no: EM132586211
Surfs Up manufactures surfboards. The company produces two models: the small board and the big board.
Data regarding the two boatrds are as follows:
Product Direct Labor hours per unit Annual production (units) Total direct labor hours
Big 1.25 10,000 15,000
Small 1.00 35,000 35,000
The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate of $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time.
Blake Moor, the company's controller, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. Blake has identified the following four separate activity centers:
Activity center Cost driver Traceable costs Big board Small board
Machine setup Number of setups 100,000 100 100
Special design Design hours 364,000 250 100
Production Direct labor hours 900,000 15,000 35,000
Machining Machine hours 300,000 3,000 1,000
Required:
Question a. Calculate the overhead rate for each activity center on the basis of activity-based costing.
Question b. Determine the total cost required to produce one unit of each product. Use the overhead rates calculated in a.
Question c. If the price of the big board is $175 and the small for $140, calculate the profit per unit and the profit margin (return per unit).
Question d. Is ABC Costing better than traditional, why?