Cost Information at Various Levels of Monthly Production

Production Volume

Pacific Company produces and sells car brake shoes. It supplies you the following information regarding costs at various levels of monthly production:

Required:

1.The Accountant of the company has limited knowledge about various types of costs and cost behaviour. He has classified the costs into Fixed and Variable as appears in the right-hand column in the above table. Do you agree with the Accountant’s cost classification? Why, or why not? Can you identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings:

2.One of the junior trainee accountant who is a recent Uni. graduate has mentioned that not all costs can be strictly classified into fixed and variable. There may be some costs that are not strictly variable or fixed. They are called mixed costs. 

Do you agree with this trainee? If so, how do you split the mixed costs into Fixed and Variable elements and develop an equation for total monthly production costs?

3.Explain to the management how to develop and use the cost equation you developed in (2) above to predict total costs for the monthly production volume of any number of units and also calculate the correct unit cost.

4.In 2019 the company has produced 8 000 units. According to the Accountant’s calculations the unit cost was $27.71. The company added 10% margin to the cost and was selling its products for $30.50. However, the financial results show that there was a gross loss in the year. The company management cannot understand this mystery. 

Explain to the management why there was a loss.

Sorrento Ltd. Produces three high-tech gadgets: HD Television, Handheld Tablets and Mobile Phones. The company uses a single plant-wide factory overhead rate to all three products based on direct labour hours. The selling price per unit for the three products are as follows:

HD TV - $984.00

Tablets - $648.00

Mobile phones - $795.00

However, the company has noticed that of the three products the Tablets are high in demand at the set price and are selling fast, but the TVs and mobile phones are not selling even if the quality is quite good. The management is asking you to find out the possible reasons for this mystery. They suspect that there may be something wrong with their costing and pricing. They have heard that Activity Based Costing (ABC) is capable of producing more accurate costing and pricing. They supply you with the following information:

The total budgeted annual production overhead cost of the company is $1 400 000.  The company has supplied you detailed information and breakdown about their overhead cost.

The company has determined the major activities and cost pools that account for the total overhead cost of the company. These activities, along with their budgeted activity costs, are as follows:

Sorrento Ltd has estimated the following activity-base usage and units produced for each of its three products:

Required:

1.Using the single plant-wide factory overhead rate method determine the applied factory overhead cost per unit for the TV, Tablet and Mobile phones. 

2.Calculate the total unit cost of production for each product using the material and labour cost information provided to you and the overhead cost you have calculated in 1 (above).

3.Determine the factory overhead cost and total cost of production per unit for the TV, Tablet and Mobile phones using the Activity Based Costing.

4.Which method provides more accurate product costing? Why?

5.Explain to the management of Sorrento Ltd. why the Tablets were sold fast and the TV and phones were not selling at the existing prices.