AAA Fence Company manufactures wireless and aluminium fences in a common manufacturing facility. The company has become aware of unusual discrepancies in the costs of its products which management cannot explain. It seems that the sales and related production of wireless fences are in a very consistent growth market and are easily predicted. However, the sales and related production of aluminium fences are very erratic. Management does not understand why the costs per unit of wireless fences change when the production level seldom changes.
Required:
a. After some investigation you determine that for the last two quarters, the common fixed cost of the manufacturing operation has been $800,000. For the first quarter 12,000 wireless and 13,000 aluminium units were produced, respectively. For the second quarter, 12,000 wireless and 8,000 aluminium units were produced, respectively. What were the total cost per product and the cost per unit of each product in each quarter when production units is the allocation basis?
b. After studying the results of the above computations you decide to use the company's average quarterly production of 12,000 wireless and 10,500 aluminium units as the allocation base, respectively. What are the total cost per product and the cost per unit per quarter for each product when average production is used?
c. Which allocation base do you recommend, and why?

Question

Quizplus · Accepted Answer

The Answer is a.
First quarter:
Wireless Fence:
Allocated costs: $800,000 × 12,000/25,000 = $384,000
Cost per unit: $384,000/12,000 = $32.00
Aluminium Fence:
Allocated costs: $800,000 × 13,000/25,000 = $416,000
Cost per unit: $416,000/13,000 = $32.00
Second quarter:
Wireless Fence:
Allocated costs: $800,000 × 12,000/20,000 = $480,000
Cost per unit: $480,000/12,000 = $40.00
Aluminium Fence:
Allocated costs: $800,000 × 8,000/20,000 = $320,000
Cost per unit: $320,000/8,000 = $40.00
b.
Average method, all quarters:
Wireless Fence:
Allocated costs: $800,000 × 12,000/22,500 = $426,667
Cost per unit: $426,667/12,000 = $35.56
Aluminium Fence:
Allocated costs: $800,000 × 10,500/22,500 = $373,333
Cost per unit: $373,333/10,500 = $35.56
c.
Approach in part b is better because it eliminates the short-run fluctuations of fences and provides management with a consistent cost pattern.

AAA Fence Company Manufactures Wireless and Aluminium Fences in a Common