The management of Pacific Wellness Centre, a health food company, recently wants to analyze the cost of two of its famous customized products. The customization is not so much on the content but rather on the packaging as some of the firms wants their firm’s logo on the package. In analyzing these products, the management accountant has identified the following data for a typical month in a year. Activity/ResourcesCost-Driver BaseActivity Cost in a Typical MonthActivity Volume in a Typical Month1. Unit level1.1 Acquired and use material for Fruity BarNumber of units produced$60,0001,000,000 units1.2 Acquired and use direct labor for Fruity BarNumber of direct-labor hours worked20,0002,000 direct labor hours1.3 Acquire and use material for Energy BarNumber of units produced80,000800,000 units1.4 Acquire and use direct labor for Energy BarNumber of direct-labor hours worked30,0002,000 direct labor hours2. Batch Level2.1Number of batches30,000100 batches3. Product Level3.1 Provide product-level advertisingNumber of promotions100,000100 promotions3.2 Provide product-level recordsNumber of products20,0002 products4. Customer Level4.1 Take customer product ordersNumber of customer orders40,0002,000 customer orders4.2 Deal with customer complaintsNumber of complaints20,0001,000 complaints5. Facility Level5.1 Supervise direct laborAmount of direct-labor costs10,000$50,000 for activities 1.2 and 1.4 (supervision costs = 20% of direct labor costs.)5.2 Use main buildingNumber of square feet40,00010,000 square feetRecently, the company’s management team attended a presentation on Activity Based costing system and wants to compute the total cost and unit cost of two of its major customized products that has the following activities in the month of August:Fruity BarEnergy Bar1.1 and 1.3 Material800,000 units900,000 units1.2 and 1.4 Direct labor1,600 hours2,100 hours2.1 Quality control – batches50 batches40 batches3.1 Advertising projects – promotions50 promotions40 promotions3.2 Products recorded1 product1 product4.1 Customer orders800 customer orders900 customer orders4.2 Customer complaints600 complaints300 complaints5.1 Direct-labor supervision$16,000$31,5005.2 Main building use6,000 sq. ft.3,000 sq. ft.Required1.Use ABC to compute the total cost and unit cost of each of the two products given the activity level for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions](20 marks)2.Assume that the company’s traditional costing system had assigned overhead costs at a rate of $0.10 per unit of output plus $20.00 per direct labour hour. Overhead costs are the sum of the batch-level, product-level, customer -level, and facility-level costs. Using this traditional costing approach, compute the cost for each product (including material and direct-labor costs) given the activity level for the month of August. Compute both the total cost and unit cost for each product for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions](10 marks)3.Do the units costs of the two products computed under ABC and traditional costing systems differ significantly? If so, what causes the differences?(5 marks)4.You have just discovered that the product manager of Fruity Bar has been less than honest in reporting the number of direct-labor hours used. In checking the payroll records, you discover that 2,000 direct-labor hours ($20,000 direct-labor costs) actually were used in August to produce Fruity Bar, not 1,600 hours as the product manager reported. Why might the product manager of Fruity Bar have understated the number of direct-labor hours used to produce it? (Assume traditional costing is used). (5 marks)
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