Destin Brass Products Co.

1. Answer – 1
The product costs have been analyzed as below.

Standard Unit Cost

Description Percentage Valves Pumps Flow Controllers
Material $16.00 $20.00 $22.00
Direct labour $4.00 $8.00 $6.40
Total Overhead per Product 439% $17.56 $35.12 $28.10
Standard Unit Cost $37.56 $63.12 $56.50

Revised Unit Cost

Description Percentage Valves Pumps Flow Controllers
Material $16.00 $20.00 $22.00
Material overhead 48% $7.68 $9.60 $10.56
Setup Labour $0.02 $0.05 $0.48
Direct Labour $4.00 $8.00 $6.40
Other Overhead (machine hour basis) $21.30 $21.30 $8.52
Revised Per Unit Cost $49.00 $58.95 $47.96
Budgeted Budgeted Budgeted
Activity Indirect Quantity of Indirect Unit
Machine Depreciation 270000 10800 hr 25 /hr
Setup Labour 2688 168 hr 16 /hr
Receiving 20000 129 transaction 155.03876 /transaction
Material handling 200000 129 transaction 1550.3876 /transaction
Engineering 100000 20%,30%, 50%
Packaging and supply 60000 30 transactions 2000 /transaction
Maintenance 30000 10800 hrs 2.7777778 /hr

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 Valves Pumps Flow Controllers
Description Total Unit Total Unit Total Unit
Direct Cost
Direct materials $120,000.00 $16.00 $250,000.00 $20.00 $88,000.00 $22.00
Direct Labour $30,000.00 $4.00 $100,000.00 $8.00 $25,600.00 $6.40
Total Direct cost $150,000.00 $20.00 $350,000.00 $28.00 $113,600.00 $28.40
Overheads
Machine Depriciation $93,750.00 $12.50 $156,250.00 $12.50 $20,000.00 $5.00
Setup Labour $128.00 $0.02 $640.00 $0.05 $1,920.00 $0.48
Receiving $620.16 $0.08 $3,875.97 $0.31 $15,503.88 $3.88
Material Handling $6,201.55 $0.83 $38,759.69 $3.10 $155,038.76 $38.76
Engineering $20,000.00 $2.67 $30,000.00 $2.40 $50,000.00 $12.50
Packaging and Shipping $2,000.00 $0.27 $14,000.00 $1.12 $44,000.00 $11.00
Maintenance $10,416.67 $1.39 $17,361.11 $1.39 $2,222.22 $0.56
Total Overheads $133,116.37 $17.75 $260,886.77 $20.87 $288,684.86 $72.17
Total $283,116.37 $37.75 $610,886.77 $48.87 $402,284.86 $100.57

ABC - Transaction
Description Valves Pumps Flow Controllers
Material $16.00 $20.00 $22.00
Direct labour $4.00 $8.00 $6.40

Total Direct cost per product $20.00 $28.00 $28.40

Total Indirect Cost $17.75 $20.87 $72.17
Total cost Per unit $37.75 $48.87 $100.57

2. Answer – 2
Comparing the results we can see that there is a considerable difference between the 2
results. The difference is due to the method of calculation of the indirect ie. Overhead cost
of the objects.

Difference of Cost
Description Valves Pumps Flow Controllers
ABC Method $37.75 $48.87 $100.57
Direct Method $49.00 $58.95 $47.96
Varience $11.25 $10.08 $52.61

Direct cost includes material and direct labor for both methods. For revised method we
have taken setup cost as a direct cost from the overhead cost. For indirect cost overhead
cost was assigned on the basis of labor cost. Each Dollar of running will cause to add $4.39
to be allocated as overhead to the specific product. For revised costing overhead is divided
into 2 parts

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 1. Material related overhead
2. Other Overhead

Material handling cost and receiving cost (48% of material cost) is included in material
handling overhead. Other overhead includes the rest of the cost. The total other overhead
is then divided by the machine hour which gives us 42.59$ per machine hour. The details of
allocation is given below.

Costing
Direct Cost Indirect Cost
Method

• Machine Depreciation
• Setup Labor
• Receiving
• Material Handling
• Material • Engineering
Standard
• Direct Labor • Packing and Shipping
Unit cost
• Maintenance

Total Labor cost = 9725 hr x $16 = $155600

Overhead Rate = 682688/155600

Material related overhead

Other Overhead
• Receiving • Machine Depreciation
• Material Handling • Engineering
• Material
• Packing and Shipping
Revised • Direct Labor
Overhead absorption rate = • Maintenance
Unit Cost • Setup Cost
$220000/$458000 = 48%
Overhead absorption
rate = $460000/10800
hr = $42.59

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 3. Answer – 3
The differences in unit cost is given below as per different methods.

Method Valves Pumps Flow Controllers

Standard Cost Per Unit 37.56 63.12 56.496
Revised Standard Cost 49 58.95 47.96
Cost by ABC Method 37.75 48.87 100.57

The above results show that the ABC method is the best choice for determining the cost of
a particular product. It specifically points to the main issue that the pumps are over costed
and can be sold for a lower price. Whereas the Flow controllers can be priced higher though
that may take some negotiations. The market situation also points to the same results ie for
the Flow controllers they have no competitors. Although the price of the flow controllers
will be raised to $100+ it should not affect the company much as the competition is low and
the product comparatively contributes lower percentage (21%) to the revenue. The valve
price will not be altered significantly.

Destin Brass should go for activity based costing as it represents a more accurate costing
model.

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 4. Answer – 4
We shall look at the cost of each article using both the methods and compare them.

Cost Comparison
Method Valves Pumps Flow Controllers
Total Number of articles Produced 7500 12500 4000
Cost of Each Article
Costing by Standard Method 37.56 63.12 56.496
Cost by ABC Method 37.75 48.87 100.57

Then we can compare the net income according to the method.

Standard Method
Total Revenue of Cost of Goods
Sale Price Goods per Article Sold per Unit per Cost of Goods
Description Units Per Unit Type type Sold per type Net Income Gross Margin
Sales Cost of Goods
Valves $ 7,500.00 $ 57.78 $ 433,350.00 $ 37.56 $ 281,700.00 $ 151,650.00 35%
Pumps $ 12,500.00 $ 81.26 $ 1,015,750.00 $ 63.12 $ 789,000.00 $ 226,750.00 22%
Flow Controllers $ 4,000.00 $ 97.07 $ 388,280.00 $ 56.50 $ 225,984.00 $ 162,296.00 42%
Total Values $ 1,837,380.00 $ 1,296,684.00 $ 540,696.00 29.428%

ABC Costing Method

Total Revenue of Cost of Goods
Sale Price Goods per Article Sold per Unit per Cost of Goods
Description Units Per Unit Type type Sold per type Net Income Gross Margin
Sales Cost of Goods
Valves $ 7,500.00 $ 57.78 $ 433,350.00 $ 37.75 $ 283,125.00 $ 150,225.00 35%
Pumps $ 12,500.00 $ 81.26 $ 1,015,750.00 $ 48.87 $ 610,875.00 $ 404,875.00 40%
Flow Controllers $ 4,000.00 $ 97.07 $ 388,280.00 $ 100.57 $ 402,280.00 $ (14,000.00) -4%
Total Values 1837380 1296280 541100 29.450%

We see that there is a difference of 404.00 dollars in net profit and .03% change in Gross
Margin. Although there is a 4% loss due to the flow controllers we can see the pump actually
covers the loss. The gross margin from valves is almost the same and the difference is
negligible.

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