Wedig Diagnostics

Data
Model U.S. EU Total
Selling price per unit $2,500 $2,200
Direct material /unit $235 $260
Direct labor /unit $560 $500
Units sold annually 15,000 16,800
Tax rate 30% 15%
Number of batches 45 55 100
Number of parts per unit 40 80
Total number of parts 600,000 1,344,000 1,944,000 Number of parts per unit * Number of units sold annually
Total direct labor cost 8,400,000 8,400,000 16,800,000 Direct labor /unit* Number of units sold annually

Total manufacturing overheads $39,000,000 U.S.

Working Notes:
Calculation of manufacturing overhead allocated to each model using ABC
Allocated
Amount Activity cost pool Activity level Activity rate Activity level overhead
Batch related cost $12,000,000 Number of batches 100 $120,000 per batch 45 $5,400,000
Parts related cost $9,000,000 Total number of parts 1,944,000 $4.63 Per part 600,000 $2,777,778
Direct labor related cost $18,000,000 Total direct labor cost 16,800,000 $1.07 Per direct 8,400,000 $9,000,000
Total manufacturing overheads $39,000,000 $17,177,778
Activity rate = Cost of activity / activity level
Allocated overhead = Activity rate *Activity level of the model

a. Calculate the unit manufacturing cost of the U.S. and EU models using total direct labor dollars to allocate the $39 million of manufacturing overhead.
Calculations of the unit manufacturing cost of the U.S. model and EU model
U.S. EU Total
Direct material $3,525,000 $4,368,000 $7,893,000 Direct material /unit* Number of units sold annually
Direct labor $8,400,000 $8,400,000 $16,800,000 Direct labor /unit* Number of units sold annually
Manufacturing overheads $19,500,000 $19,500,000 $39,000,000 Total manufacturing overhead /Total direct labor* Direct labor of the m
Total manufacturing cost $31,425,000 $32,268,000 $63,693,000 Direct material +Direct labor + Manufacturing overhead
Units sold annually 15,000 16,800
Manufacturing cost per unit $2,095.00 $1,920.71 Total manufacturing cost/ Number of units sold annually

b. Calculate the unit manufacturing cost of the U.S. and EU models using the ABC analysis to allocate the $39 million of manufacturing overhead.
Calculations of the unit manufacturing cost of the U.S. model and EU model using ABC analysis
U.S. EU Total
Direct material $3,525,000 $4,368,000 $7,893,000 Direct material /unit* Number of units sold annually
Direct labor $8,400,000 $8,400,000 $16,800,000 Direct labor /unit* Number of units sold annually
Manufacturing overheads
Batch related cost $5,400,000 $6,600,000 $12,000,000 See working note
Parts related cost $2,777,778 $6,222,222 $9,000,000
Direct labor related cost $9,000,000 $9,000,000 $18,000,000
Total manufacturing cost $29,102,778 $34,590,222 $63,693,000 Direct material +Direct labor + Manufacturing overhead
Units sold annually 15,000 16,800
Manufacturing cost per unit $1,940.19 $2,058.94 Total manufacturing cost/ Number of units sold annually

c. Prepare income statements (including income tax expense) for wedig and its European subsidiary using the unit manufacturing costs calculated in Part
U.S. EU Total
Sales $37,500,000 $36,960,000 $74,460,000 Selling price per unit *Number of units sold annually
Less: manufacturing cost $31,425,000 $32,268,000 $63,693,000 See part a
Income before Tax $6,075,000 $4,692,000 $10,767,000 Sales -Manufacturing cost
Less: Tax $1,822,500 $703,800 $2,526,300 Income before tax* Tax rate
Income After tax $4,252,500 $3,988,200 $8,240,700 Income before tax- Tax

d. Prepare income statements (including income tax expense) for Wedig and its European subsidiary using the unit manufacturing costs calculated in part
U.S. EU Total
Sales $37,500,000 $36,960,000 $74,460,000 Selling price per unit *Number of units sold annually
Less: manufacturing cost $29,102,778 $34,590,222 $63,693,000 See part b
Income before Tax $8,397,222 $2,369,778 $10,767,000 Sales -Manufacturing cost
Less: Tax $2,519,167 $355,467 $2,874,633 Income before tax* Tax rate
Income After tax $5,878,056 $2,014,311 $7,892,367 Income before tax- Tax

e. Discuss the advantages and disadvantages of using direct labor versus ABC to allocate the $39 million of overhead.
Advantages of using direct labor to allocate manufacturing overhead :
1. Even though the total sales and total manufacturing expenses are same, after tax income of Wedig Diagnostics is higher in part a ($8240700) (where direct labor do
The difference in the income after tax is due to income tax.
Wedig Diagnostics can take advantage of different tax rate.
2 .Activity based costing may be difficult to set up and establish.
3. ABC can be time consuming.

Disadvantages of using direct labor to allocate manufacturing overhead :

1. Activity based costing allocated indirect cost more accurately.
2 .ABC system helps in reducing the cost by eliminating unwanted activities.
3. ABC system helps in improving product and customer profitability.
4. Activity based costing helps in forecasting and planning.
 ts sold annually

EU

Allocated
Activity level overhead
55 $6,600,000
1,344,000 $6,222,222
8,400,000 $9,000,000
$21,822,222

manufacturing overhead.

ct labor* Direct labor of the model

uring overhead
ts sold annually

cturing overhead.

uring overhead

ts sold annually

ng costs calculated in Part (a) (using total direct labor dollars ).

ng costs calculated in part (b) (overhead is allocated using the ABC analysis).

40700) (where direct labor dollars is used as allocation base) than part b ($7892367) (ABC is used to allocate manufacturing overhead).