117521887 Sippican Corporation

Topics: Costs, Variable cost, Activity-based costing Pages: 6 (294 words) Published: December 19, 2014
Sippican Corporation
According to the activity based costing, the manufacturing overhead should be apportioned in the following method
The Direct Material cost per unit and the direct labour cost per unit for the valves, pumps and the flow controller is given below.

Direct Material Direct Labour
Total Units
Cost/unit
cost/unit
Valves
7500
16
12.35
Pumps
12500
20
16.25
Flow Controller
4000
22
13

The total manufacturing overhead of $654600 should be apportioned based on the activity required for manufacturing each of the valves, the pumps and the flow controller. The various manufacturing overheads required for the production is given below for each of the products.

Valves
Manufacturing Total Overhead Cost Driver
Overhead
Hours
Rate

Engineering
Production
Shipping
Set up
Machine

78000
15600
109200
117000
334800

900
345
340
3400
11200

Pumps

Flow Controller

No of hours Total Cost No. of hours Total Cost No.of hours Total Cost

86.66666667
45.2173913
321.1764706
34.41176471
29.89285714

60
20
40
100
3750
Total

5200
904.34783
12847.059
3441.1765
112098.21
134490.8 Total

240
100
100
600
6250

20800
600
52000
4521.73913
225 10173.91304
32117.64706
200 64235.29412
20647.05882
2700 92911.76471
186830.3571
1200 35871.42857
264916.8022 Total
255192.4004

Now, we know the overheads required for each of the products. Thus, we shall now find out the cost of each product based on the activity based costing. This can be found by including the direct material cost and the direct labour cost for each of the product.

Valves
Manufacturing
Overhead
Direct Material
Cost
Direct Labour
Cost
Total Cost
Total Cost/unit

Pumps

Flow Controller

134490.8

264916.8022

255192.4004

120000

250000

88000

92625

203125

52000

347115.8

718041.8022

395192.4004

46.282106

57.44334417

98.79810011

According to the traditional costing method and the ABC method, the cost of valves , pumps and flow controller is given below

Valves
Cost(Traditional
Method)
Cost(ABC Method)
Actual Selling Price
Gross
Margin(Traditional
Method)
Gross Margin(ABC
Method)

Pumps

Flow Controller

51.2
46.2821
79

66.31
57.4433
70

59.05
98.7981
95

35%

5%

37%

41%

18%

-4%

The gross margins % of valves and pumps were at a higher value when the costing is done by the ABC method. But, the flow controller is sold at a price lower than the cost price. Hence, it is advisable to increase the price of the Flow Controller to atleast $98.7981 to realize any profit.

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