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Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R). The company has
two divisions: the assembly division, and the retail division.
The company’s policy is to transfer the machines from the assembly division to the retail division at full cost plus
10%. This has resulted in internal transfer prices, when S and R are being transferred to the retail division, of
$220·17 and $241·69 respectively. The retail division currently sells S to the general public for $320 per machine
and R for $260 per machine. Assume it incurs no other costs except for the transfer price.
The retail division’s manager is convinced that, if he could obtain R at a lower cost and therefore reduce the external
selling price from $260 to $230 per unit, he could significantly increase sales of R, which would be beneficial to both
divisions. He has questioned the fact that the overhead costs are allocated to the products on the basis of labour
hours; he thinks it should be done using machine hours or even activity based costing.
You have obtained the following information for the last month from the assembly division:
Product S Product R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80
Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
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Total 877,620
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Required:
(a) Using traditional absorption costing, calculate new transfer prices for S and R if machine hours are used as
a basis for absorption rather than labour hours.
Note: round all workings to 2 decimal places. (3 marks)
(b) Using activity based costing to allocate the overheads, recalculate the transfer prices for S and R.
Note: round all workings to 2 decimal places. (8 marks)
(c) (i) Calculate last month’s profit for each division, showing it both for each product and in total, if activity
based costing is used. (3 marks)
the issue is in the cost of labour. it was done before using labour hours but we are to use the machine hours in calculations.i calculated as: the labor cost per hour is $12 * machine hour p.u to get S-$24 and R-$9. in the answer they picked the labour hours as it is in the question.what is the reasoning behind it?morning John. Thank you for your feedback. my concern is with the (000) denoted in some of the measurements. should i use it without the (000) pr with it because it is causing a lot of confusion and one can easily make mistakes especially where the measurements do not have the (000).
Brunti.
products XYI,YZT & ABW. Units(000) 50,40,30 respectively. SP p.u 45,95,73. Prime cost p.u 32,84,65.machine depart. Machine hrs p.u 2,6,4.assembly depart. Direct labour hrs p.u 7,3,2.overheads allocated to machine n assembly depart. resp. 504,000 & 437,000.cost pools- (000)machine services 357.assembly services 318. Set-up costs 26. Order processing 156. Purchasing 84. machine hrs 420,000.direct labour hrs 530,000.set-up 520.customer order 32,000.supplier order 11,200. Estimates.XYI,YZT,ABW.No. of set-ups 120,200,200.customer order 8,000,8,000,16,000.supplier order 3,000,4,000,4,200..
Required
prepare and present budget estimates using:
Absorption costing
activity based costing
comment on these results.