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Corporation Code Outline 6
Sippican Corporation
According to the activity based costing, the manufacturing overhead should be apportioned in the following method The Direct Material cost per unit and the direct labour cost per unit for the valves, pumps and the flow controller is given below.
Direct Material Direct Labour Cost/unit cost/unit
Total Units V al ve s Pumps Fl ow Control l e r
7500 12500 4000
16 20 22
12.35 16.25 13
The total manufacturing overhead of $654600 $654600 should be apportioned based on the activity required for manufacturing each of the valves, the pumps and the flow controller. The various manufacturing overheads required for the production is given below for each of the products.
Valves
Pumps
Flow Controller
Manufacturing Total Overhead Cost Driver Overhead
Hours
Rate
No of hours hours Total Total Cost No. of hours hours Total Total Cost No.of hours hours Total Total Cost
Engine ering
78000
900
86.66666667
60
Production
15600 109200
345 340
45.2173913 321.1764706
20 904.34783
100 4521.73913
225 10173.91304
40 12847.05 .059
100 32117.64 .64706
200 64235.29 .29412
117000 334800
3400 11200
34.41176471 29 29.89285714
100 3441.1765
600 20647.05882
2700 92911.76471
3750 112098.21 .21
6250 186830.35 .3571
1200 35871.42 .42857
Shipping Set up Machine
Total
5200
134490.8 Total
240
20800
264916.8022 Total
600
52000
255192.4004
Now, we know the overheads required for each of the products. Thus, we shall now find out the cost of each product based on the activity based costing. This can be found by including the direct material cost and the direct labour cost for each of the product.
Valves
Pumps
Flow Controller
Manufacturing Overhead
134490.8
264916.8022
255192.4004
Direct Material Cost
120000
250000
88000
92625
203125
52000
347115.8
718041.8022
395192.4004
46.282106
57.44334417
98.79810011
Direct Labour Cost Total Cost Total Cost/unit
According to the traditional costing method and the ABC method, the cost of valves , pumps and flow controller is given below
Valves
Pumps
Flow Controller
Cost(Traditional Method)
51.2
66.31
59.05
46.2821
57.4433
98.7981
79
70
95
Method) Gross Margin(ABC
35%
5%
37%
Method)
41%
18%
-4%
Cost( ABC Me thod) Actual Selling Price Gross Margin(Traditional
The gross margins % of valves and pumps were at a higher value when the costing is done by the ABC method. But, the flow controller is sold at a price lower than the cost price. Hence, it is advisable to increase the price of the Flow Controller to atleast $98.7981 to realize any profit.
