a

1. Cost per unit of each model of sewing machine under traditional costing system
Under traditional method of costing, the allocation of factory overheads is done based on volume such as number of units produced, labour hours used or machine hours consumed. This implies that there is only one driver of factory overhead and an average overhead absorption rate is applied to all products irrespective of the number of activities involved in manufacturing of each product and the complexity of those activities. This costing system is simple to use, however it is not suitable when different type of products are being manufactured.
The complete calculation for per unit cost of each model of sewing machine is given below.
The first step would be to calculate Overhead absorption rate as per traditional costing.
    Total Overhead Cost
     
     
    Inspections
    $30,000.00
    Assembly
    $100,000.00
    Production Scheduling
    $110,000.00
    Machine set-up
    $40,000.00
    Total Overheads
    $280,000.00
Total number of Machine Hours =Machine Hours for Basic model+ Machine Hours for advanced model
= 4700+3500= 8200
Overhead absorption rate=    Total cost of Overhead/Total number of machine Hours
(based on Machine Hours)
Overhead absorption rate    =    280000/8200
    =     $34.15 (rounded off to nearest 2 decimal places)
Information given in the problem, is summarized below, for ease of calculations
.
    Summary of information
    Particulars
    Basic
    Advanced
     
     
     
    Units produced & sold
    1700
    1600
    Direct Material Cost per unit
    $350
    $580
    Direct Labour Cost per unit
    $175
    $280
     
     
     
The below table shows the calculation on cost per unit of both the models in detail
    Calculation of Cost per unit based on traditional costing
    Particulars
    Basic Model
    Advanced Model
     
    Working
    Amount
    Working
    Amount
     
     
     
     
     
    Direct Material Cost
    350*1700
    $595,000
    580*1600
    $928,000
    Direct Labour Cost
    175*1700
    $297,500
    280*1600
    $448,000
    Overheads Cost (Overhead Absorption rate* Machine Hours)
    34.15*4700
    $160,505
    34.15*3500
    $119,495
    Other Operating Expenses
     
     
     
     
    Selling & Admin
     
     
     
    $300,200
    Interest
     
     
     
    $40,500
    Office Rent
     
     
     
    $42,800
     
     
     
     
     
    Total Costs (X)
     
    $1,053,005
     
    $1,878,995
    No. of Units Produced & Sold (Y)
     
    1700
    
    1600
    Cost per Unit (X)/(Y)
     
    $619
     
    $1,174
     
     
     
     
     
Notes:
The Overhead cost model for advanced model has been adjusted in above calculations due to round off’s.
Overhead cost for advanced model= No. of Machine * Overhead Absorption
                Hours            rate
            =    34.15*3500
            =    $119,525
However, as total overhead cost is $280,000, and $160505 allocated to Basic Model, the remaining amount is $119,495 ($280000-160505).
Thus, the per unit cost of each model as per traditional costing system is
Basic Model =        $619
Advanced Model =        $1,174
2. Cost per Unit of the two models of sewing machine under Activity Based Costing
Activity based costing is a method of costing that is used to distribute overhead costs among various products and services .This method identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each product and service. The cost of each activity is assigned based on the cost driver of that activity.
This method provides more accurate way of allocation of overheads cost. It is used by companies that manufacture large number of different products and have high overhead costs. However, this method is complex and costly to implement.
The complete calculation for per unit cost of each model of sewing machine under Activity based costing is given below.
First step would be to find out the Overheads cost per unit of cost driver for each type of overhead.
    Overheads
    Cost (A)
    Cost Driver
    Basic
    Advanced
    Total (B)
    Unit Cost per Cost driver (A)/(B)
     
     
     
     
     
     
     
    Inspections
    $30,000
    Inspections
    210
    760
    970
    $31
    Assembly
    $100,000
    Machine Hours
    4700
    3500
    8200
    $12
    Production Scheduling
    $110,000
    Runs
    60
    510
    570
    $193
    Machine set-up
    $40,000
    Set-up
    120
    270
    390
    $103
    Calculation of Cost per unit based on Activity Based Costing
    Particulars
    Basic Model
    Advanced...