5-50    Activity-Based Costing Johnson Marine manufactures marine radios in three models—the 1600 model for the small boat enthusiast who will not venture far from shore, and the 2400 and 3600 models

 

 

 

 

Chapter 5   Activity-Based Costing and Customer Profitability Analysis 165

 

for the those with the need for more features, range, and sensitivity. Johnson manufactures only these three products. Johnson has the following manufacturing activities and the budgeted cost for each:

 

  Setup labor	Cost $ 231,000
Equipment	135,660
Assembly	739,500
Materials handling	405,000
Purchasing	92,400
Inspection	325,000

$1,928,560

 

 

Johnson uses a volume-based costing system that is based on labor-hours, since the assembly opera- tion is the largest cost operation in the company. The direct labor rate is $22 per hour.

Johnson is considering an ABC approach to calculating product cost and has selected the following cost drivers for each activity:

 

Activity                            Driver

Setup labor                    Number of setups

Equipment                    Machine-hours

Assembly                     Direct labor-hours Materials handling                               Weight of materials Purchasing                               Materials cost

Inspection                    Number of orders shipped

 

 

Johnson also has the following budgeted production data for the three products:

 

 

Â	1600	2400	3600
Units produced	10,000	4,000	1,000
Price	$    200	$ 350	$ 600
Production orders	25	70	200
Production setups	10	50	50
Orders shipped	100	400	800
Direct materials cost per unit	$     40	$    70	$    90
Weight of materials per unit	1	3	5
Direct labor-hours per unit	3	4	5
Machine-hours per unit	6	8	10

 

Required

1.    Determine the unit cost for each of the three products using the current volume-based system.

2.    Determine the unit cost for each of the three products using the ABC method.

3.    Interpret the difference between your findings in requirements 1 and 2.