The management of Pacific Wellness Centre, a health food company, recently wants to analyze the cost of two of its famous customized products.

The management of Pacific Wellness Centre, a health food company, recently wants to analyze the cost of two of its famous customized products. The customization is not so much on the content but rather on the packaging as some of the firms wants their firm’s logo on the package. In analyzing these products, the management accountant has identified the following data for a typical month in a year. 

Activity/ResourcesCost-Driver BaseActivity Cost in a Typical MonthActivity Volume in a Typical Month

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1. Unit level

1.1 Acquired and use material for Fruity BarNumber of units produced$60,0001,000,000 units

1.2 Acquired and use direct labor for Fruity BarNumber of direct-labor hours worked20,0002,000 direct labor hours

1.3 Acquire and use material for Energy BarNumber of units produced80,000800,000 units

1.4 Acquire and use direct labor for Energy BarNumber of direct-labor hours worked30,0002,000 direct labor hours

2. Batch Level

2.1Number of batches30,000100 batches

3. Product Level

3.1 Provide product-level advertisingNumber of promotions100,000100 promotions

3.2 Provide product-level recordsNumber of products20,0002 products

4. Customer Level

4.1 Take customer product ordersNumber of customer orders40,0002,000 customer orders

4.2 Deal with customer complaintsNumber of complaints20,0001,000 complaints

5. Facility Level

5.1 Supervise direct laborAmount of direct-labor costs10,000$50,000 for activities 1.2 and 1.4 (supervision costs = 20% of direct labor costs.)

5.2 Use main buildingNumber of square feet40,00010,000 square feet

Recently, the company’s management team attended a presentation on Activity Based costing system and wants to compute the total cost and unit cost of two of its major customized products that has the following activities in the month of August:

Fruity BarEnergy Bar

1.1 and 1.3 Material800,000 units900,000 units

1.2 and 1.4 Direct labor1,600 hours2,100 hours

2.1 Quality control – batches50 batches40 batches

3.1 Advertising projects – promotions50 promotions40 promotions

3.2 Products recorded1 product1 product

4.1 Customer orders800 customer orders900 customer orders

4.2 Customer complaints600 complaints300 complaints

5.1 Direct-labor supervision$16,000$31,500

5.2 Main building use6,000 sq. ft.3,000 sq. ft.

Required

1.Use ABC to compute the total cost and unit cost of each of the two products given the activity level for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions](20 marks)

2.Assume that the company’s traditional costing system had assigned overhead costs at a rate of $0.10 per unit of output plus $20.00 per direct labour hour. Overhead costs are the sum of the batch-level, product-level, customer -level, and facility-level costs.  Using this traditional costing approach, compute the cost for each product (including material and direct-labor costs) given the activity level for the month of August. Compute both the total cost and unit cost for each product for the month of August. [Show ALL relevant calculations – use appropriate tables to present your solutions](10 marks)

3.Do the units costs of the two products computed under ABC and traditional costing systems differ significantly? If so, what causes the differences?

(5 marks)

4.You have just discovered that the product manager of Fruity Bar has been less than honest in reporting the number of direct-labor hours used. In checking the payroll records, you discover that 2,000 direct-labor hours ($20,000 direct-labor costs) actually were used in August to produce Fruity Bar, not 1,600 hours as the product manager reported. Why might the product manager of Fruity Bar have understated the number of direct-labor hours used to produce it? (Assume traditional costing is used).       (5 marks)

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