Analysis Of Production Costs And Pricing Strategy For Mobile Phones, Tablets, And Computers

Questions:

A computer manufacturer produces three types of devices: mobile phones, tablets, and computers. For the production of these three devices you have the following information:

	Phone	Tablet	Computer Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Material cost per unit	£90	£140	£315
Direct labor hours per unit	2	2.5	4
Budgeted units	1,500,000	900,000	1,200,000
Labor cost per hour	£8
Overhead costs per annum
Utilities	£20,000,000
Rent	£15,000,000
Audit and legal	£5,000,000
Administrative staff	£40,000,000
Total	£80,000,000

ABC analysis suggested that overhead costs are distributed to the three products according to the table below:

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

For each of the three products, the company aims at a different percentage for profit. Under the full absorption costing method and the targeted profit percentage, the prices of the three products should be:

	Phone	Tablet	Computer
Full costing price	£170.69	£233.87	£435.67

1. 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.

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

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

1. The following is the required solution:

Budgeted units	1500000	900000	1200000
(Amounts in £)
Particulars	Phone	Tablet	Computer
Direct material	1350,00,000.00	1260,00,000.00	3780,00,000.00
Direct labour	240,00,000.00	180,00,000.00	384,00,000.00
Overheads	238,80,597.01	179,10,447.76	382,08,955.22	800,00,000.00
in	30,00,000.00	22,50,000.00	48,00,000.00	100,50,000.00
Total cost	1828,80,597.01	1619,10,447.76	4546,08,955.22
divided by the number of budgeted units	15,00,000.00	9,00,000.00	12,00,000.00
Cost per unit	121.92	179.90	378.84
Price per unit	170.69	233.87	435.67
Profit	48.77	53.97	56.83
Profit in %	0.29	0.23	0.13

2. The following is the required solution:

(Amounts in £)
Budgeted units	15,00,000.00	9,00,000.00	12,00,000.00
Particulars	Phone	Tablet	Computer
Direct material	1350,00,000.00	1260,00,000.00	3780,00,000.00
Direct labour	240,00,000.00	180,00,000.00	384,00,000.00
Utilities	80,00,000.00	50,00,000.00	70,00,000.00
Rent	82,50,000.00	22,50,000.00	45,00,000.00
Audit and legal	29,00,000.00	12,50,000.00	8,50,000.00
Administrative staff	232,00,000.00	60,00,000.00	108,00,000.00
Total cost	2013,50,000.00	1585,00,000.00	4395,50,000.00
divided by the number of budgeted units	15,00,000.00	9,00,000.00	12,00,000.00
Cost per unit	134.23	176.11	366.29
Profit %	0.29	0.23	0.13
Price per unit	172.59	216.75	414.07

3. Activity based costing method is the method in which the cost to the various activities are allocated on the basis of the activity drivers in each of the product. This is the most logical method of allocating the cost since this is the way in which the cost will be allocated on the basis of the amount of the activities that are used in the business.

(Accounting coach, 2015)

The companies must go for the costing method that requires them to implement the ABC in the 5 step product costing sequence. In this, the direct costs that are associated with the cost of the object are identified. For a given object of the cost, the company attempts to identify all the costs that are currently being treated as the overhead cost and is capable of being traced directly to the product. The costs must be removed from the pool of the overheads and directly be traced to the product. This way the costs are started to be assigned to the individual products and jobs.

(Classes.bus.oregonstate.edu, 2015)

The following are the main advantages of the ABC due to which the company must go for it:

1. The method takes into account the individual activities that are based upon the use of the resources
2. The method enables the accurate costing of all the activities that are obtained throughout the organization
3. With the help of this method, it is easier to identify the low and the high costs and the causes of the each.
4. It serves as a valuable tool for both the business and for the improvement of the processes
5. It helps in the planning of the future.

(Managers-net.com, 2014)

The second method of costing strategy seems logical since, the prices have been determine keeping in mind the ABC costing method. 

References:

Managers-net.com, (2014). Activity Based Costing (ABC). Retrieved 19 October 2014, from https://www.managers-net.com/activityBC.html

AccountingCoach.com, (2015). Activity Based Costing | Explanation | Accounting Coach. Retrieved 31 January 2015, from https://www.accountingcoach.com/activity-based-costing/explanation

Classes.bus.oregonstate.edu, (2015). CHAPTER 11: ACTIVITY-BASED COSTING. Retrieved 31 January 2015, from https://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%2011.htm