TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for$1,600. The production cost computed per unit under traditional costing for each model in2019 was as follows:Traditional Costing TRIXDirect Materials $700Direct Labour ($20/hour) $120Manufacturing overhead ($38 per DLH) $228Total per unit cost $1, 048In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, thegross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing itsdecision, management asks TikTok Electronics management accountant to prepare an3analysis using activity-based costing (ABC). The management accountant accumulates thefollowing information about overhead for the year ended December 31, 2019.Activity CostPoolsCost Drivers EstimatedOverheadExpected Use ofCost DriversPurchasing Number oforders$1,200,000 40,000Machine setups Number ofsetups900,000 18,000Machining Machine hours 4,800,000 120,000Quality Control Number ofinspections700,000 28,000The cost drivers used:Cost Drivers TRI-X ProductPurchase orders 17,000Machine setups 5,000Machine hours 75,000Inspections 11,000Required:1. Calculate the activity rates for each of the overhead items using the four cost drivers. 2. Using the rates in (1) determine the unit cost for TRI-X. 3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommendwhether or not TRI-X should be discontinued. SHOW YOUR WORKING
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for
$1,600. The production cost computed per unit under traditional costing for each model in
2019 was as follows:
Traditional Costing TRIX
Direct Materials $700
Direct Labour ($20/hour) $120
Manufacturing overhead ($38 per DLH) $228
Total per unit cost $1, 048
In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the
gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its
decision, management asks TikTok Electronics
3
analysis using activity-based costing (ABC). The management accountant accumulates the
following information about overhead for the year ended December 31, 2019.
Activity Cost
Pools
Cost Drivers Estimated
Overhead
Expected Use of
Cost Drivers
Purchasing Number of
orders
$1,200,000 40,000
Machine setups Number of
setups
900,000 18,000
Machining Machine hours 4,800,000 120,000
Quality Control Number of
inspections
700,000 28,000
The cost drivers used:
Cost Drivers TRI-X Product
Purchase orders 17,000
Machine setups 5,000
Machine hours 75,000
Inspections 11,000
Required:
1. Calculate the activity rates for each of the overhead items using the four cost drivers.
2. Using the rates in (1) determine the unit cost for TRI-X.
3. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend
whether or not TRI-X should be discontinued.
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