Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply:
Brass Chrome White
Projected sales in units 30,000 50,000 40,000
Per Unit data:
Selling price $40 $20 $30
Direct materials $8 $4 $8
Direct labour $15 $3 $9
Overhead cost based on direct labour
hours (traditional system) $12 $3 $9
Hours per 1000-unit batch:
Direct labour hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20
Total overhead costs and activity levels for the year are estimated as follows:
Activity Overhead costs Activity levels
Direct labour hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500
Required:
a. Using the traditional (simple) costing system, determine the operating profit per unit for the brass style of faucet.
b. Determine the activity cost driver rate for setup costs and inspection costs.
c. Using the ABC system, for the brass style of faucet:
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.
d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
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