Case 18 3 Safety Monitoring Devices, Inc.

CASE 18-3 : Case Analysis

Safety Monitoring Devices, Inc.

SMD Management is facing a huge problem on what cost systems should they must use in order to increase profit. The original product which is ODD was deemed to have been allocated with cost than the new product which is TGD.

1. Calculation of the Full Cost Per Unit of ODD and TGD:

A. Existing cost method—use DL hrs to spread OH costs including corporate overhead as case says to spread the total overhead cost to products.

* Determine the Direct Labor hours for the entire production

ODD | TGD | TOTAL DIRECT LABOR HOURS |

25,000 unitsX 4 Direct Labor Hours/Unit100, 000 Hours | 12,500 unitsX 4 Direct Labor Hours/Unit50,000 Hours | 100,000 hours –ODD 50,000 hours – TGD 150,000 hours |

* Find the Overhead Rate

| Therefore... |

$ 1,430,000+1,570,000$3,000,000 = Total Overhead | $3,000,000/150,000 units = $20 per Direct Labor Hour |

* Find Full Cost Per Unit

| ODD | TDG |

Direct MaterialsDirect LaborOverhead = Direct Labor Hrs per Unit x Overhead Rate | $88.00 64.00 80.00 | $111.00 64.00 80.00 |

FULL COST PER UNIT | $232.00 | $255.00 |

B. Proposed ABC method  - find rates for each cost to be allocated

Corporate Overhead | Budgeted | Driver | Total Driver | Rate |

R&DMarketingGeneral Administration | $300,000 380,000 750,000 | Pr. TypePr. TypePr. Units | 5237,500 | $60,000 190,00025K+12.5K 20.00 |

ABC Method ...Continuation.

| Budgeted | Driver | Total Driver | Rate |

Manufacturing OverheadPurchasingMaterials HandlingMachine set-upSupervisionQuality ControlPackaging & ShippingMachine DepreciationPlant Miscellaneous | 120,000125,000180,000225,000195,000210,000165,000240,000110,000 | PosPart #sBatchesDirect Labor HrsPr. UnitsShipmentsMachine HoursPr. UnitsMachine hours | 90 + 21018 + 3224 +...