University of Hertfordshire MSc Assignment

	Phone	Tablets	Computers	Total
Material cost per unit	£90	£140	£315	445
Direct labor hours per unit	2	2.5	4	8.5
Budgeted units	1,500,000	900,000	1,200,000	3,600,000
DLHs	3,000,000	2,250,000	4,800,000	10,050,000
Overhead rate for DLHs = £7.96
Labor cost per hour	£8
Overhead costs per annum
Utilities	£20,000,000.00
Rent	£15,000,000.00
Audit and legal	£5,000,000.00
Administrative staff	£40,000,000.00
Total	£80,000,000.00
Overheads	Phone	Tablet	Computer
Utilities	£8,000,000	£5,000,000	£7,000,000
Rent	£8,250,000	£2,250,000	£4,500,000
Audit and legal	£2,900,000	£1,250,000	£850,000
Administrative staff	£23,200,000	£6,000,000	£10,800,000
Total	£42,350,000	£14,500,000	£23,150,000

 

 

Calculate the aimed profit percentages for the three products and under the full absorption costing method, with overhead costs absorbed on the basis of direct labour hours.

	Phones	Tablets	Computer
Full costing sales price	£170.69	£233.87	£435.67
Material cost	£90.00	£140.00	£315.00
Direct Labor cost	£16.00	£20.00	£32.00
Overhead based on DLHs	£15.92	£19.90	£31.84
Profit	£48.77	£53.97	£56.83
profit percentage	28.57%	23.08%	13.04%

 

Use the profit percentages that you derived in (1) and calculate the prices of the three products under the ABC system.

	Phones	Tablets	Computers
Full costing sales price	£170.69	£233.87	£435.67
Material cost	£90.00	£140.00	£315.00
Direct Labor cost	£16.00	£20.00	£32.00
Overhead based on ABC	£28.23	£16.11	£19.29
Profit	£53.69	£52.83	£54.95
profit percentage	28.57%	23.08%	13.04%

 

Recommend a cost system and include any changes that you would suggest to the pricing strategy of the computer company.

The above analysis adopts a traditional (single cost driver) costing method and it can be seen from the same analysis that overheads are assigned to products in relation to direct labour hour used in such production, and this spreads overhead to computers due to high labour utilizations. However, left section of the table does show that phones incur more overheads than computers in the process irrespective of the fact that more overhead is spread to computers in the table. On that accord, activity-based costing is recommended to the company. If the company adopts activity-based costing, it will be able to allocate overhead based on the actual resources utilized in production and this will mean that the phones will absorb more overhead than other devices. This decisions is right if viewed from the fact that it will ensure accuracy of the cost calculation and potential increase profitability in the process as costs will only be incurred in relation to the activity performed.

In terms of pricing, the right strategy suggested in this case is by adding a certain level of perfection to each product line (cost-plus-profit pricing strategy) and this pricing strategy will work well if the prices that has been derived are in line with the range that the market is offering for such products under high level of increased competition and availability of substitute products. However, it is important to note that ABC costing strategy will increase overhead for phones, which implies that price of phones will be considerably raised in the process. This goes to mean that it might not be so possible to retain the same price level if cost-plus-profit pricing as recommended in this paper is utilized. On the same hand, if the company was performing well under the previous, the company might intentionally retain the same price and enjoy an even greater profit percentage from the same product as compensations for the potentialities that can arise from the need to reduce the summarized profit level of phones.

Reference

Stephen, E. (2008). Activity based costing – Topic gateway series no.1. Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_activity_based_costing_nov08.pdf.pdf [Accessed on: 8^th April 2015].