September 2023 The Genre company is the manufacturer of two products the Basic and the Advanced Details of production data

September 2023 Business Finance Assignment

The Genre company is the manufacturer of  two products the Basic and the Advanced .Details of production data and product cost data are as follows:
                                                                                                       Basic                       Advanced
Direct material                                                                                40                                  60
Direct labour                                                                                   2 hours                        3 hours
Manufacturing overhead                                                              2 hours                        3 hours
Direct labour cost per hour                                                          $15 per hour              $15 per hour
Production                                                                                      2000 units                    10000 units
Manufacturing overhead has traditionally used  direct labour hours to calculate the predetermined  overhead  rate.

The Manufacturing overhead budget is as follows:
    Set up costs                                                                               $360,000
    Engineering costs                                                                       180,000
    Machine related costs                                                               900,000
    Plant related costs                                                                      192,000
    Total                                                                                         $1,632,000

The Genre company has traditionally priced its products at  120 per cent of manufacturing cost .
Recently the Genre company has found it has had difficulty selling its advanced product with a competitor entering the market from overseas and making substantial sales at a price considerably below Genre’s price for the Advanced product .

The CEO of Genre ,Jane Monk, cannot understand  how this could be and has asked you to investigate the matter.You start to examine some of the data and decide  to check out a new approach to allocate costs called Activity Based Costing .You have managed to identify the following

  Activity Cost Pool                      Cost Driver                                  Budgeted level of Cost Driver
  Set up costs                               Number of production runs          80 runs
  Engineering costs                     Engineering changes                      200 engineering changes
  Machine related costs             Machine hours                                18,000 hours
  Plant related costs                    Floor space in sq ft                         3,840 sq ft

In addition the following information has been determined :
–The Basic product is manufactured in production runs of 50 units each and the Advanced product
   is manufactured in 250 unit batches
–75% of the engineering changes are used by the Basic product with the remaining 25% used by the
    Advanced product
–Each Basic product requires 4 machine hours whereas each Advanced product requires 1 machine
–The plant has 3,840 square feet of floor space with 80% of it used in the production of the Basic

Using the information above and your knowledge of Activity Based  Costing you are required to provide answers to the following :
(a) Calculate the predetermined overhead rate that would be used under traditional overhead
(b) Calculate the product cost per unit for the Basic and Advanced products under traditional costing  
(c) Calculate the price that would be charged  for the Basic and the Advanced products under 
      traditional costing
(d) Calculate the cost per Activity for each cost pool.
( e) Calculate the cost per unit for Basic and Advanced  products using Activity Based Costing
(f) Based on your calculations with respect to Basic and Advanced products comment upon whether 
    either  product has been overcosted or undercosted
(g) Discuss the benefits that can be obtained from using an Activity Based Costing system and whether it would be useful in costing the current products