Task: Activity Based Costing
The KiteSurfRUs Manufacturing Company produces two products. One is a kite surf board designed for ocean surfing. The other product is a professional surf-board (short board) used in world class surfing competition. Most of the sales come from the kite surf product, but recently sales of professional board have been increasing. The following information relates to the products for the most recent fiscal year:
Kite Surf Kit Professional Board
Sales and production (units) 1200 800
Sales price $980 $650
Labor hour required per unit 6 9
Machine hour required per unit 5 7
Unit costs:
Direct materials $209 $255
Direct labor $85 $85
Variable overhead $70 $90
Concerning the current systems effectiveness in valuing costs of two products, KiteSurfRUs hires a consultant to create an activity-based costing system. The consultant developed the following data:
Cost pool Cost driver Total amount Kite Surf Professional Board
Equipment Machine hours $45,000 1,100 300
Material order Number of orders 16,500 475 150
Machine setups Number of setups 15,300 216 70
Quality control Number of inspection 6,000 25 5
Required to do:
Question 1. Calculate the manufacturing overhead rate based on labor hours and machine hours
Question 2. Determine the cost to manufacturing one unit of each model using two different traditional approaches; direct labor hours and machine hours.
Question 3. Determine the cost to manufacturing one unit of each model using the activity-based costing data presented above.
Question 4. Is the kite surf kit as profitable as the company may think it is based on its present system?
Question 5. What should KiteSurfRUs Company do to improve its profitability?