Brilliant Accents Company manufactures and sells three styles of ...

[chandani]

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 1000-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 labor 15  3  9
  Overhead cost based on direct labor hours
   (traditional system) 12  3  9
 
  Hours per 1000-unit batch:
  Direct labor 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 labor 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 system, determine the operating profit per unit for each style of faucet.
 
  b. Determine the activity-cost-driver rate for setup costs and inspection costs.
 
  c. Using the ABC system, for each style of faucet
   1. compute the estimated overhead costs per unit.
   2. compute the estimated operating profit per unit.
 
  d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

Question 2

____________________ represent the amount a business charges customers for products sold or services performed.
 Fill in the blank(s) with correct word

[HandsomeMarc]

Answer to Question 1

Answer:
a. Traditional system:
Operating profit per unit for Brass faucets is 5 = 40 - (8 + 15 + 12)
Operating profit per unit for Chrome faucets is 10 = 20 - (4 + 3 + 3)
Operating profit per unit for White faucets is 4 = 30 - (8 + 9 + 9)

b. The activity-cost-driver rate for setup costs is 4,900 per setup hour = 465,500/95, and for inspection costs is 150 per inspection hour = 405,000/2,700.

c. ABC system:
Overhead costs per unit for Brass faucets are 9.40 per unit.
30,000 units in projected sales / 1,000 units per batch = 30 batches;
30 batches  1 setup hour per batch = 30 setup hours;
30 batches  30 inspection hours per batch = 900 inspection hours

30 setup hours  4,900 = 147,000/30,000 units = 4.90/unit
900 inspection hours  150 = 135,000/30,000 units = 4.50/unit
Overhead costs for Brass faucets (4.90 + 4.50) = 9.40 per unit

Operating profit per unit for Brass faucets is 7.60 = 40 - (8 + 15 + 9.40).

Overhead costs per unit for Chrome faucets are 5.45 per unit.
50,000 units in projected sales / 1,000 units per batch = 50 batches;
50 batches  .5 setup hour per batch = 25 setup hours;
50 batches  20 inspection hours per batch = 1,000 inspection hours

25 setup hours  4,900 = 122,500/50,000 units = 2.45/unit
1,000 inspection hours  150 = 150,000/50,000 units = 3.00/unit
Overhead costs for Chrome faucets (2.45 + 3.00) = 5.45 per unit

Operating profit per unit for Chrome faucets is 7.55 = 20 - (4 + 3 + 5.45).

Overhead costs per unit for White faucets are 7.90 per unit.
40,000 units in projected sales/ 1,000 units per batch = 40 batches;
40 batches  1 setup hour per batch = 40 setup hours;
40 batches  20 inspection hours per batch = 800 inspection hours

40 setup hours  4,900 = 196,000/40,000 units = 4.90/unit
800 inspection hours  150 = 120,000/40,000 units = 3.00/unit
Overhead costs for white faucets (4.90 + 3.00) = 7.90 per unit.

Operating profit per unit for White faucets is 5.10 = 30 - (8 + 9 + 7.90).

d. Traditional system:
Operating profit per unit for Brass faucets is 5 = 40 - (8 + 15 + 12).
Operating profit per unit for Chrome faucets is 10 = 20 - (4 + 3 + 3).
Operating profit per unit for White faucets is 4 = 30 - (8 + 9 + 9).

ABC system:
Operating profit per unit for Brass faucets is 7.60 = 40 - (8 + 15 + 9.40).
Operating profit per unit for Chrome faucets is 7.55 = 20 - (4 + 3 + 5.45).
Operating profit per unit for White faucets is 5.10 = 30 - (8 + 9 + 7.90).

Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated.

Answer to Question 2

Revenues