Traditional Costing

Detail
Hours worked
Predetermined Overhead rate per direct labor hour
Total Overhead cost

Standard Cello
9,000
$13.50
$121,500

ABC Costing:
Manufacturing
Overhead Cost
Building depreciation
Maintenance
Purchasing
Inspection
Indirect materials
Supervision
Supplies
Total

Cost element

Amount
$40,000
$15,000
$20,000
$12,000
$15,000
$30,000
$3,000
$135,000

Standard Cello

Direct Material
Direct Labor
Manufacturing Overhead

$150.00
$180.00
$101.67

Product cost per unit - ABC Method

$431.67

Product cost per unit - Traditional Method

$465.00

Difference in cost (ABC cost - Traditional)

($33.33)

Standard Cello
Sale price per unit
Less: Product cost under ABC Method

$600.00
($431.67)

Gross Profit / (loss)

$168.33

Gross Profit ratio or Loss ratio

28.00%

New sale price for Custom Cello to earn 28.00% profit:

Sale price of custom cello
If sale price can't be exceed from $900 per custom cello:
Sale price per unit
Less: Variable cost per unit
Direct Material
Direct Labor
Sales person commission
Total Variable Cost
Contribution Margin per unit

$900.00
$375.00
$240.00
$27.00
$642.00
$258.00

Now, calculating the breakpoint for the products:

Standard Cello
Sale price per unit
Less: Variable cost per unit
Direct Material
Direct Labor
Sales person commission
Total Variable Cost
Contribution Margin per unit
Sale Mix

$600.00

Weighted average CM

$262.30

Now, we can calculate the total breakeven point:

Breakeven point in units = Fixed Cost / Weighted average CM
Breakeven point in units = ($135,000+$30,000) / $262.30
Breakeven point in units = 629 units
Units for Standard Cello = (629 x 90%) = 566 units
Units for Custom Cello = (629 x 10%) = 63 units
Variable Income Statement is as under:

$150.00
$180.00
$18.00
$348.00
$252.00
9

Standard Cello
Sales Revenue
Less: Variable cost
Contribution Margin
Less; Fixed Expenses
Net Income

$339,600
$196,968
$142,632

Custom Cello

Total
1,000
$13.50

10,000
$13.50

$13,500

$135,000

Standard
Cello
3,000
9,000
1,500
400
900
400
900

Cost Driver
Square footage
Direct labor hours
# of purchase orders
# of inspections
# of units manufactured
# of inspections
# of units manufactured

Custom
Cello
1,000
1,000
500
600
100
600
100

Total
Activity
4,000
10,000
2,000
1,000
1,000
1,000
1,000

Total Number of units

Overhead cost per unit

Custom Cello
$375.00
$240.00
$435.00
$1,050.00
$750.00
$300.00

Custom Cello
$900.00
($1,050.00)

Activity
Rate
$10.00
$1.50
$10.00
$12.00
$15.00
$30.00
$3.00

($150.00)
-17.00%

$1,458.33

($900 x 3%)

Custom Cello
$1,000.00
$375.00
$240.00
$30.00
$645.00
$355.00
1

10

Custom Cello

Total
$63,000
$40,635
$22,365

$402,600
$237,603
$164,997
$165,000
($3)

Overhead
Standard
Custom
Cello
Cello
$30,000
$10,000
$13,500
$1,500
$15,000
$5,000
$4,800
$7,200
$13,500
$1,500
$12,000
$18,000
$2,700
$300
$91,500
$43,500
900

100

$101.67

$435.00