Week 5 ABC quiz Copy

Jones Inc. produces two types of water pumps, the WP2 and the WX4. The budget for the coming year shows the following data:

The total indirect costs of Jones are € 2.6 million per year and represent general managerial activities, equipment and machinery costs, and warehousing costs. They are fixed costs. Since both products use the same machines and equipment. Direct labor hours have a cost of € 20 per hour; these costs are variable costs. Currently, Jones calculates cost prices using a single cost pool, with direct costs as the allocation basis.

Calculate the unit cost of the WP2 and the WX4 using the current costing method of Jones.

Jim Jones, the owner of Jones Inc. is not happy with the way unit costs are calculated at the moment. He believes that the current unit costs do not accurately reflect the activities that are required for each type of pump. Therefore, he decides to implement a refined costing system. As a basis for this system, he identifies three main activities in the organization: general administrative tasks, production, and logistics. He collects the following data regarding the activity costs:

As cost drivers for the cost pools, Jones chooses the following drivers:

• General activities: the cost driver is the total direct costs. The general activities mainly relate to human resources suppor and, general
• Production: the cost driver is the number of parts. The WP2 has 20 parts per unit, the WX4 has 12 parts per unit.
• Logistics: the cost driver is the number of orders. Customers place 2,000 orders per year for the

WP2, and also 2,000 for the WX4.

Explain what a cost driver is, and use this explanation to state whether Jones has chosen the right cost drivers for the production and logistics department.

Calculate the unit cost of both types of pumps using the refined system.

Based on the results of the analysis, Jim Jones decides to focus the attention of the firm on the pump with the highest profit margin percentage according to the new unit costs (calculated under question 3). The budgeted production of the pump with the highest margin will be increased by 5,000, and the budgeted production of the other type will be decreased by 5,000 (so the total production will remain 40,000 units).

What will be the impact of this shift in production on budgeted profit? Explain the result.

While planning for the coming year, Jones learns that the supply of labor for the production department will become difficult. The highly skilled employees that are used in this department are in demand, and as a result Jones will not be able to recruit all employees that he needs to produce the number of pumps that the customers want to buy.

What type of pump should be given priority in production in order to maximize short-term profit?