Sippican Corporation

According to the activity based costing, the manufacturing overhead should be apportioned in the following method The Direct Material cost per unit and the direct labour cost per unit for the valves, pumps and the flow controller is given below.

Direct Material Direct Labour Total Units Cost/unit cost/unit Valves 7500 16 12.35 Pumps 12500 20 16.25 Flow Controller 4000 22 13

The total manufacturing overhead of $654600 should be apportioned based on the activity required for manufacturing each of the valves, the pumps and the flow controller. The various manufacturing overheads required for the production is given below for each of the products.

Valves Manufacturing Total Overhead Cost Driver Overhead Hours Rate

Pumps

Flow Controller

No of hours Total Cost No. of hours Total Cost No.of hours Total Cost

Engineering Production Shipping Set up Machine

78000 15600 109200 117000 334800

900 345 340 3400 11200

86.66666667 45.2173913 321.1764706 34.41176471 29.89285714 Total

60 20 40 100 3750

5200 904.34783 12847.059 3441.1765 112098.21 134490.8 Total

240 100 100 600 6250

20800 600 52000 4521.73913 225 10173.91304 32117.64706 200 64235.29412 20647.05882 2700 92911.76471 186830.3571 1200 35871.42857 264916.8022 Total 255192.4004

Now, we know the overheads required for each of the products. Thus, we shall now find out the cost of each product based on the activity based costing. This can be found by including the direct material cost and the direct labour cost for each of the product.

Valves Manufacturing Overhead Direct Material Cost Direct Labour Cost Total Cost Total Cost/unit 134490.8 120000 92625 347115.8 46.282106

Pumps 264916.8022 250000 203125 718041.8022 57.44334417

Flow Controller 255192.4004 88000 52000 395192.4004 98.79810011

According to the traditional costing method and the ABC method, the cost of valves , pumps and flow controller is given below

Valves Cost(Traditional Method) Cost(ABC Method) Actual Selling Price Gross Margin(Traditional Method) Gross Margin(ABC Method) 51.2 46.2821 79

Pumps 66.31 57.4433 70

Flow Controller 59.05 98.7981 95

35% 41%

5% 18%

37% -4%

The gross margins % of valves and pumps were at a higher value when the costing is done by the ABC method. But, the flow controller is sold at a price lower than the cost price. Hence, it is advisable to increase the price of the Flow Controller to atleast $98.7981 to realize any profit.