Calculation Of Cost And Profit In Sewing Machine Manufacturing

Calculation of cost per unit of the two models of sewing machines under the current traditional costing system:

Sewing Easy Ltd
Particulars	Basic Model	Advance Model Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Amount	Amount
Direct material costs	$ 5,20,000.00	$ 8,40,000.00
Direct labour costs	$ 2,40,000.00	$ 3,90,000.00
Indirect costs (see working note 1)	$ 1,43,750.00	$ 1,06,250.00
Other operating expenses:
Selling and Administration	$ –	$ 1,40,600.00
Interest expense	$ –	$ 25,200.00
office rent	$ –	$ 35,900.00
Total costs	$ 9,03,750.00	$ 15,37,950.00
No. of units	1600	1500
Cost per unit	$ 564.84	$ 1,025.30

(Refer: Excel Sheet)

Working note: 1

Total indirect costs:
Particulars	Amount
Inspection	$ 20,000.00
Assembly	$ 90,000.00
Production Scheduling	$ 1,05,000.00
Machine set up	$ 35,000.00
Total	$ 2,50,000.00

particulars	Basic Model	Advance Model	Total
Machine hours	4600	3400	8000

Allocation:
particulars	Basic Model	Advance Model
Indirect Costs allocated	$ 1,43,750.00	$ 1,06,250.00

Calculation of cost per unit of the two models of sewing machines under the activity based costing system:

Sewing Easy Ltd
Particulars	Basic Model	Advance Model
Amount	Amount
Direct material costs	$ 5,20,000.00	$ 8,40,000.00
Direct labour costs	$ 2,40,000.00	$ 3,90,000.00
Indirect costs:
Inspection	$ 4,210.53	$ 15,789.47
Assembly	$ 51,750.00	$ 38,250.00
Production Scheduling	$ 9,545.45	$ 95,454.55
Machine Set up	$ 10,000.00	$ 25,000.00
Other operating expenses:
Selling and Administration	$ –	$ 1,40,600.00
Interest expense	$ –	$ 25,200.00
office rent	$ –	$ 35,900.00
Total costs	$ 8,35,505.98	$ 16,06,194.02
No. of units	1600	1500
Cost per unit	$ 522.19	$ 1,070.80

(Refer: Excel Sheet)

1

Calculation of Activity rate
Cost pool	Cost ($) [A]	Cost driver [B]	Cost driver rate ($) [C] = [A]/[B]
Inspection	$ 20,000.00	inspections (200+750)	$ 21.05
Assembly	$ 90,000.00	machine hours (4600+3400)	$ 11.25
Production Scheduling	$ 1,05,000.00	production runs (50+500)	$ 190.91
Machine Set up	$ 35,000.00	Set up hours (100+250)	$ 100.00
TOTAL	$ 2,50,000.00

2

Inspection
particulars	Basic Model	Advance Model
Cost driver rate	$ 21.05	$ 21.05
No. of inspections	200	750
Inspection cost	$ 4,210.53	$ 15,789.47

3

Assembly
particulars	Basic Model	Advance Model
Cost driver rate	$ 11.25	$ 11.25
Machine hours	4600	3400
Inspection cost	$ 51,750.00	$ 38,250.00

4

Production Scheduling
particulars	Basic Model	Advance Model
Cost driver rate	$ 190.91	$ 190.91
Production runs	50	500
Inspection cost	$ 9,545.45	$ 95,454.55

5

Machine Set up
particulars	Basic Model	Advance Model
Cost driver rate	$ 100.00	$ 100.00
Set up hours	100	250
Inspection cost	$ 10,000.00	$ 25,000.00

Preparation of profit and loss statement of Advance model of sewing machines under the traditional costing system and activity based costing system:

Sewing Easy Ltd
Advance model
Profit and Loss Statement
Particulars	Traditional method	ABC method
Amount	Amount
Cost per unit	$ 1,025.30	$ 1,025.30
Add: margin @ 20%	$ 205.06	$ 205.06
Selling price per unit	$ 1,230.36	$ 1,230.36
Units	1500	1500
Total Sales (A)	$ 18,45,540.00	$ 18,45,540.00
Expenses:
Direct material	$ 8,40,000.00	$ 8,40,000.00
Direct Labour	$ 3,90,000.00	$ 3,90,000.00
Indirect Costs:
a). As per Traditional	$ 1,06,250.00	–
b). As per ABC
Inspection	–	$ 15,789.47
Assembly	–	$ 38,250.00
Production Scheduling	–	$ 95,454.55
Machine Set up	–	$ 25,000.00
Other Operating Expenses:
Selling and Administration	$ 1,40,600.00	$ 1,40,600.00
Interest expense	$ 25,200.00	$ 25,200.00
Office rent	$ 35,900.00	$ 35,900.00
Total Expenses (B)	$ 15,37,950.00	$ 16,06,194.02
Net Profit (A-B)	$ 3,07,590.00	$ 2,39,345.98

(Refer: Excel Sheet)

In this question, it is given that overseas buyer only wants to purchase advance model because firstly units purchased by buyer is 1500 whereas for basic model’s units are 1600. Secondly, Sewing Easy ltd earned profit under ABC method is $ 239,345.98 whereas under traditional method profit is $ 307,590.00 which means overseas buyer got benefit only from ABC method due to less profit margin earned by the seller. This signifies that cost and product issues with the improvement in quality gets resolved from the use of ABC method. The result from ABC method is more accurate than traditional based costing system.

Debit or credit balance of manufacturing overhead is called as over or under applied manufacturing overhead respectively. The three ways to deal with under/over applied overhead costs are as follows:

Written off the under/ over applied overhead costs to the COGS.
Accurate rates are at end of the year.
Allocation of under/ over applied overhead costs amongst COGS and stock accounts (WIP and FG) in ratio of unadjusted closing balance.

Benefits of ABC system:

It improves the business processes.
The biggest benefit is that the indirect overhead costs are allocated to products as per the consumption of each activity.
It recognizes and excludes non valuable resources or activities which hampers the profitability of the entity (Eldenburg and Wolcott, 2009).
More precise costing system.
Cost drivers can be used usefully that are likely to be allocated to the product.

Limitations of ABC system:

It is very costly to implement ABC system and very expensive to maintain because it requires ample resources (Eldenburg and Wolcott, 2009).
ABC does not adapt accounting rules.
It is irrelevant for external reporting purpose.
Not suitable for small entities.

References

Eldenburg, L.G. and Wolcott, S.K. 2009, Cost management: measuring, monitoring and motivating performance, John wiley and sons.

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