Cost Allocation Using ABC Method

This management accounting assignment explores the Activity-Based Costing (ABC) method for allocating manufacturing overhead costs. It details the calculation of cost per activity, allocation of machine-related, setup & inspection, engineering, and plant-related costs to two products, Fred and Martha. The assignment further demonstrates how these allocated costs contribute to the unit costing of each product and how pricing is determined based on a markup percentage.

MANAGEMENT ACCOUNTING
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MANAGEMENT ACCOUNTING
Question 1
For the manufacturing overhead cost allocation as per ABC method, the first step would be to
determine the cost per activity based on the respective cost drivers which has been carried out
below.
Taking the above per activity cost, manufacturing overheads relating to each activity would
be allocated to Fred and Martha based on the given production data provided. This is
highlighted below.
Allocation of Machine Related Costs
Machine related cost per machine hour = $ 50 (from above table)
One unit of Fred consumes four machine hours as against one machine hour consumed by
each unit of Martha.
Hence, machine related costs allocated to every Fred unit = 4*50 = $ 200
Hence, machine related costs allocated to every Martha unit = 1*50 = $ 50
Allocation of Setup and Inspection
Each run related setup cost = $ 4,500 (from above table)
In each production run, the production of Fred and Martha amounts to 50 units and 250 units
respectively.
Inspection cost on production of each Fred unit = (4500/50) = $ 90
Inspection cost on production of each Martha unit = (4500/250) = $ 18

MANAGEMENT ACCOUNTING
Allocation of Engineering Costs
Engineering cost incurred by company per engineering order change = $ 900 (from above
table)
It is known that engineering costs are incurred by Fred and Martha in the ratio of 75:25.
Hence, total engineering costs allocated to Fred = (75/100)*90000 = $ 67,500
Further, total engineering costs allocated to Martha = (25/100)*90000 = $ 22,500
Engineering cost per unit of Fred considering annual production of 1000 units = 67500/1000
= $67.5
Engineering cost per unit of Martha considering annual production of 5000 units =
22500/5000 = $4.5
Allocation of Plant related Costs
On the basis of the information given in the question, it is evident that Fred production uses
factory area to the extent of 80% while Martha production uses the rest of the factory area.
Hence, total plant related cost allocated to Fred production = (80/100)*96000 = $ 76,800
Further, total plant related cost allocated to Martha production = (20/100)*96000 = $ 19,200
Unit plant related cost for Fred = 76800/1000 = $ 76.8
Unit plant related cost for Martha = 19200/5000 = $ 3.84
Unit manufacturing overhead cost allocation
Manufacturing cost per unit Fred production = 200 + 90 + 67.5 + 76.8 = $434.3
Manufacturing cost per unit Martha production = 50 + 18 + 4.5 + 3.84 = $76.34
Based on the unit manufacturing overhead allocation highlighted above, the unit costing of
the two products as per ABC is tabled below.

MANAGEMENT ACCOUNTING
Question 2
It is known that the company prices the products at 120% of the unit manufacturing cost.
Considering the unit costs computed above the price of both the products can be derived.
Unit price for Fred = 504.3*1.2 = $ 605.16
Unit price for Martha = 181.34*1.2 = $ 217.6