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notsponge [240]
3 years ago
11

Company XYZ has 2 fixed price contracts for 2 different clients. The company has enough capacity for both contracts but is uncer

tain whether they will be profitable. Using the information below, a) calculate the activity-based costs and profits for each contract (this requires more than one step) and b) calculate the profit for each job using absorption costing, absorbing overheads using molding hours: Enter all answers in number format without commas, decimals, or dollar signs. Customer AAA BBB Component Type A999 B999 Contract Value ($) $27,000 $100,000 Contract Quantity 1,000 unit 2,000 unit Material cost/unit $15 $20 Molding time/batch 5 hours 7.5 hours Batch size 100 units 50 unitsAnnual Budgeted overheads as follows:Activity Cost Driver Cost driver CostMolding Molding hours 2,000 $150,000Inspection Batches 150 $75,000Production Mgmt Contracts 20 $125,000 Required:Calculate the activity-based costs and profits for each contract.
Business
1 answer:
frozen [14]3 years ago
3 0

Answer:

<em>The contract A yields a loss under ABC but Contract B yields a profit.</em>

<em>ABC Profit  contract A  $ (3000) contract B  $ 11250</em>

<em>Under absorption costing both contract yield profits.</em>

<em>Absorption Profit    contract A  $ 3250 contract B    $7500   </em><em> </em>

<em>Management should make decisions using ABC and reject Contract A and accept Contract B.</em>

<em></em>

Explanation:

Customer                         AAA               BBB

Component Type           A999                B999

Contract Value ($)       $27,000            $100,000

Contract Quantity         1,000 unit        2,000 unit

Material cost/unit              $15                        $20

Molding time/batch          5 hours            7.5 hours

Batch size                       100 units                50 units

Activity Based Rate= Cost per Unit of Cost Driver

Activity                Cost driver         Cost                 Rate

Molding                2,000              $150,000        $150,000 / 2,000 = 75

Inspection            150                   $75,000        $75,000/150 = 500

<u>Production             20                 $125,000        $125,000/20=  6250         </u>

<u>Total                                             $ 350,000                                           </u>

<u />

<u>Cost Drivers Consumed</u>

<u>Activity</u>                              A999                                      B999

Molding time/batch          5 hours* 10                    7.5 hours *40

                                            50                                   300

Batch size              1,000 unit/ 100 units          2,000 unit/50 units

                                     = 10                                      =40

ABC  Profits for Each Contract

                                         A999                                      B999

Selling Price                  $27,000                              $100,000

Materials                      15*1000                                  20 * 2000  

                                    =   15000                                   =   40,000

Molding                   50 hours *75                               300* 75

                                    3750                                       22500

Inspection             10 batches *500                       40 batches *500

                                 $ 5000                                    $ 20000

Management Contracts    $ 6250                             $ 6250

<u>Total                            $ 30,000                               $ 88,750</u>

<u>Profit                            $ (3000)                                $ 11250</u>

<u></u>

<u>Overhead Rate  Absorption Costing</u>

Total Overheads= ( 150,000 + 125,000+ 75000) = $ 350000

Annual Molding Hours = 2000

<u>Rate= $ 350,000/2000=$ 175 per molding hour</u>

<u></u>

<u>Absorption Costing </u>

<u>Profit For each Contract</u>

<u></u>

                                         A999                                      B999

Selling Price                  $27,000                              $100,000

Materials                      15*1000                                  20 * 2000  

                                    =   15000                                   =   40,000

Overheads                50 hours *175                           300 Hours *175

                               =  8750                                            = 52,500

<u>Total Cost                    23750                                      92500            </u>

<u>Profit                             3250                                            7500         </u>

<u></u>

<em>The contract A yields a loss under ABC but Contract B yields a profit.</em>

<em>Under absorption costing both contract yield profits.</em>

<em>Management should make decisions using ABC and reject Contract A and accept Contract B.</em>

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