Wedig Diagnostics manufactures two lasers photometer that are used in preparing DNAs. The US model is designed for use in the United States and in the EU model is designed to meet the specifications in most of the European Union. Both models are manufactured in the U.S . The EU models are shipped to Wedig wholly owned European subsidiary, which sells them. All units manufactured are sold. The following table summarizes the selling prices, direct materials and labor, number of units sold.
- U.S. Model EU Model
- Selling price/unit $2,500 $2,200
- Direct material/unit $235 $260
- Direct labor/unit $560 $500
- Number of units sold annually 15,000 16,800
The EU units are sold in U.S. dollars. Wedig has total manufacturing overhead of $39 million annually. This overhead is allocated to both U.S. and EU models using total direct labor dollars. Wedig transfers its EU model subsidiary at full cost (direct materials and labor plus allocated overhead). Assume that Wedig pays US. Taxes only on the profit it makes on the sales in the US and the Wedig EU Subsidiary pays taxes only on the profits it makes on the sales in the EU. The US income tax rate is 30% and the EU subsidiary has a tax rate of 15 %.
Wedig hires a consulting firm to do ABC analysis of its overhead costing methodology. The analysis reveals thay $39 million of overhead consist of three cost pools: batch-related cost ($12 million), parts-related ($9 million) and direct-labor related costs ( $18 million). Each model is produced in batches and bath-related cost consists of engineering, quality control, and matching costs that vary with the number of batches produced. The US model is produced in 45 batches each year.
The US and EU models differ in terms of the number of different parts in each unit. The US model has 40 different part numbers and the EU model has 80 different part number. Part related parts consist of the cost of the operating the purchase department ( excluding the cost of the parts purchased), inspecting the parts, inventorying the parts, and managing the parts of inventory. Parts related cost vary with the number of part numbers in each product. Finally, the direct labor-related costs consists of human resources ,accounting, and over-head costs that vary with the amount of direct labor in each model.
Required:
a. Calculate the unit of manufacturing cost of the US and EU models using total direct labors to allocate $39 of manufacturing overhead.
b. Calculate the unit manufacturing cost of the U.S. and EU models using ABC analysis to allocate the $39 million of manufacturing over head.
c. Prepare income statements (including income tax expenses) for Wedig and its European subsidiary using the unit of manufacturing costs calculated in part (a) (overhead is calculated using total direct labor dollars).
d. Prepare income statements (including income tax expense) for Wedig and its European subsidiary using the unit manufacturing costs calculated in part (b) (overhead is allocated using the ABC analysis).
e. Discuss the advantages and disadvantages of using direct labor versus ABC to allocate the #39 million overhead