Mba620 - Financial Decision Making - Cost Allocation

Summary of the Results and Recommendations

University of Maryland University College

MBA620 Financial Decision Making

Question 1

1. Cost Allocation

        Total fixed cost for producing both Processor01 and Android01 is 5,000,000 dollars. As the fixed cost is to be assigned at the rate of 70 percent to Processor01 and 30 percent to Android01, the fixed cost for Android is 1,500,000 dollars. This fixed cost of Android01 is for production of 300 units, therefore the fixed cost per unit will be 5,000 dollars.

        Regarding the variable cost whose total is 25,000,000 dollars, the total variable cost of Android01 is 30 percent of this when allocation base is square feet of the factory space, which makes the variable cost for 300 units of Android01 is 7,500,000 dollars, 25,000 dollars per unit. When it comes to using labor as the allocation basis, the total variable cost of Android01 is calculated at the rate of 40 percent of the total cost, which results in 10,000,000 dollars for 300 units, 33,333 dollars per unit.

        In conclusion, the total cost per unit of Amdroid01 is the sum of 5,000 + 25,000 + 25,000 (the remaining cost) = 55,000 dollars for factory space allocation basis, 5,000 + 33,333 + 25,000 = 63,333 collars for labor allocation basis.

1. Recommendation

        Increasing efficiency and competency of workers is one of the ways to reduce the labor hours consumed by machines and employees, which as a result will save the variable cost. In order to do so, providing efficiency training to the employees is one idea. Another idea is to provide an opportunity to workers to have a discussion on how they are able to improve their labor quality and how to minimize or optimize the machine operation.

Question 2

1. Actively-based Costing

        According to the provided information, the major activities that are cost drivers for the production of both products are fabricator setup and component assembly.

        The annual number of fabricator setup for both products is 25,000, and the total cost is 10,000,000 dollars. This means the cost per setup is 400 dollars. Android01 requires 40 setups per unit, therefore 16,000 dollars is the total cost of fabricator setup for Android01.

        As for component assembly, its total annual cost is 15,000,000 dollars, 125,000 assemblies a year. The cost per assembly turns to be 120 dollars. Since the number of assembly for Android01 is 180, the total cost of component assembly for Android01 is 21,600 dollars.

        Finally, the cost of Android01 using activity-based costing amounts to 67,600 dollars which is the total of 5,000 (Fixed cost per unit, Question 1) + 16,000 + 21,600 + 25,000 (The remaining cost, Question 1).

1. Recommendation

        In order to produce Android01 in a way that will yield more profit, first, it is suggested to see the possibility to unify the size of screw used for assembly. Unifying screws will decrease the variety of screws, minimize the number of tools required, and increase the efficiency of the assembly process, which will eventually cut the variable cost.

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