Gigabyte, Inc., manufactures three products for the computer industry: Gismos (product G): annual sales, 8,000 units Thingamajigs (product T): annual sales, 15,000 units Whatchamacallits (product W): annual sales, 4,000 units The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:
Product G |
Product T |
Product W |
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Raw material |
$ |
105.00 |
$ |
157.50 |
$ |
52.50 |
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Direct labor |
48.00 |
(2.4 hr. at $20) |
36.00 |
(1.8 hr. at $20) |
24.00 |
(1.2 hr. at $20) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Manufacturing overhead* |
420.00 |
($48 × 875%) |
315.00 |
($36 × 875%) |
210.00 |
($24 × 875%) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total product cost |
$ |
573.00 |
$ |
508.50 |
$ |
286.50 |
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4. Gigabyte’s controller, Nan O’Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte’s management to understand its product costs better. She got top management’s approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabyte’s product lines. These data are summarized as follows: (Round Percentage of Total Raw-Material Cost to the nearest whole percentage.)
Activity Cost Pool | Cost Driver |
Product G |
Product T |
Product W |
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Machinery | Machine hours |
24 |
% |
50 |
% |
26 |
% | |||
Machine setup | Number of setups |
22 |
% |
30 |
% |
48 |
% | |||
Inspection | Number of inspections |
16 |
% |
44 |
% |
40 |
% | |||
Material handling | Raw-material costs |
25 |
% |
69 |
% |
6 |
% | |||
Engineering | Number of change orders |
35 |
% |
10 |
% |
55 |
% | |||
Show how the controller determined the percentages given above for raw-material costs.
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5. | Develop product costs for the three products on the basis of an activity-based costing system. (Round intermediate and final answers to 2 decimal places.) |
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6. | Based on your answers in the above requirement, calculate a target price for each product, using Gigabyte’s pricing formula. (Round your intermediate calculations and final answers to 2 decimal places.) |
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