Android 01 Cost Allocation: Allocate Costs And Factory Space ✓ Solved

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Effective cost allocation is essential for businesses to determine accurate product costing, evaluate profitability, and make strategic decisions. This paper explores various cost allocation methods applied to the production of Android01, including factory space allocation, labor allocation basis, and activity-based costing (ABC). It discusses the calculation of costs using each method, compares their implications, and provides a recommendation based on accuracy and strategic considerations. Additionally, the paper examines markup pricing strategies, illustrating how costs influence product pricing decisions to ensure profitability and competitive advantage.

Introduction

Cost management plays a pivotal role in manufacturing efficiency and financial performance. Accurate allocation of costs ensures that companies understand the true cost of their products and can price them appropriately to cover expenses and generate profits. Several methods exist for cost allocation, each with its strengths and limitations. This paper evaluates three prominent methods—factory space allocation, labor-based allocation, and activity-based costing—in the context of producing Android01, a product with complex cost structures.

Factory Space Allocation Method

The factory space allocation method assigns costs based on the proportion of factory space utilized by Android01 production. According to the data, the total variable cost of production is $6,000,000, and 300 units of Android01 are produced. Dividing the total variable cost by the number of units results in a variable cost per unit of $20,000. The variable cost of components per unit is $25,000, and 30% of total fixed costs, amounting to $1,500,000, are allocated to the units based on factory space. This results in a fixed cost allocation of $5,000 per unit, leading to a total cost per unit of $50,000 when combining variable and fixed costs.

Labor Allocation Basis

Using the labor allocation method, costs are apportioned based on labor hours or labor effort associated with production. Total variable costs amount to $8,000,000, and dividing this by 300 units yields a variable cost per unit of approximately $26,666.70. The component cost remains at $25,000 per unit with an additional fixed cost of $5,000 per unit, as per the data. Consequently, this method produces a higher total cost per unit of approximately $56,666.70. This method provides a different perspective emphasizing labor effort as the primary cost driver.

Comparison and Recommendation

Comparing both methods, the factory space allocation results in a lower per-unit cost ($50,000) than the labor basis method ($56,666.70). The choice of method influences pricing strategy and profitability analysis. The report recommends the labor allocation method because it tends to allocate costs more accurately in labor-intensive processes, preventing undercosting that might result from the simplistic factory space approach. Accurate costing is crucial for setting prices that cover costs and ensure profitability, especially in competitive markets.

Activity-Based Costing (ABC)

Activity-Based Costing offers a more refined approach by assigning costs based on activities that consume resources. For Android01, the major activity is component assembly, requiring 180 assemblies per unit; producing 300 units involves 54,000 assemblies out of a total of 125,000 assemblies in the factory. The total variable cost for assembly is $10,800,000, leading to a per-unit assembly cost of $36,000 after dividing by the units produced. Adding the component cost of $25,000 yields a total cost per unit of $61,000 using ABC. This method captures the complexity of production activities and provides a granular view of cost distribution.

Pricing Strategy: Markup Pricing

IPS applies a markup of 30% on full costs to determine the selling price of Android01. Total fixed costs allocated to Android01 are $15,000, and variable costs per unit are $48,000, resulting in a full cost of $63,000 per unit. Applying a 30% markup on this full cost produces a markup amount of $18,900, resulting in a final selling price of $81,900 per unit. This pricing approach ensures that the company covers all costs and achieves desired profit margins, aligning product pricing with overall financial objectives.

Conclusion

Accurate cost allocation methods significantly impact product pricing, profitability, and strategic decision-making. While factory space and labor basis methods are simpler, their accuracy varies depending on the nature of production processes. Activity-Based Costing provides more precise insights by linking costs to specific activities, making it particularly suitable for complex manufacturing environments. The recommended approach for Android01 is activity-based costing, complemented by a markup pricing strategy that ensures profit margins are maintained effectively, thus supporting sustainable business growth.

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