Question

Albert Co. produces golf carts.  One of its plants in Nashville produces two versions of carts: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, bigger tires, and softer seats.  At the beginning of the year, the following data were prepared by the controller’s office for this Texas plant:

                                                                                         Basic                          Deluxe

Expected Quantity to Produce                                    20,000 carts                 10,000 carts

Selling Price                                                                $  1,800                       $  3,600

Direct Material Cost                                                   $     500                       $  1,000

Direct Labor Cost                                                       $     300                       $     600

Machine Hours                                                               1,000                           3,000

Direct Labor Hours                                                      10,000                         10,000

Activity Center (Cost Driver)

Engineering Support (Hours)                                         1,500                           4,500

Receiving (Orders Processed)                                           300                              500

Material Handling (Number of Moves)                         2,000                           4,000

Purchasing (Number of Orders)                                        100                              200

Maintenance (Machine Hours Used)                             1,000                           3,000

Paying Suppliers (Invoices Processed)                            250                              500

Equipment Setups (Number of Setups)                              20                                60

Total overhead costs of $6,000,000 associated with  activity centers are reported as:

Maintaining Equipment                                              $ 1,140,000

Engineering Support                                                   $ 1,200,000

Material Handling                                                       $ 1,200,000

Setting Up Equipment                                                 $    960,000

Purchasing Materials                                                   $    600,000

Receiving Goods                                                        $    400,000

Paying Suppliers                                                         $    300,000

Providing Facility Space                                             $    200,000

Facility-level costs are allocated on basis of machine hours used .  This provides a measure of time the facility is used by each product.

Requirements:

1. Calculate the cost to produce each type of cart using direct labor hours as basis to allocate overhead costs.
2. Calculate the cost to produce each type of cart using  activity-based-costing.
3. Explain the difference in the costs using the two different accounting systems. Provide appropriate supporting quantitative analysis.

Answer 1

1)Calculation of Predetermined Overhead rate = 6,000,000/20,000 = $300 per direct labor hour

	Basic	Deluxe
Sales	$ 36,000,000.00	$ 36,000,000.00
Direct Material Cost	$ 10,000,000.00	$ 10,000,000.00
Direct Labor Cost	$    6,000,000.00	$    6,000,000.00
Overhead	$    3,000,000.00	$    3,000,000.00
Income	$ 17,000,000.00	$ 17,000,000.00

2)Activity Based Costing

	Basic	Deluxe
Sales	$ 36,000,000.00	$ 36,000,000.00
Direct Material Cost	$ 10,000,000.00	$ 10,000,000.00
Direct Labor Cost	$    6,000,000.00	$    6,000,000.00
Maintaining Equipment	$        285,000.00	$        855,000.00
Engineering Support	$        300,000.00	$        900,000.00
Material Handling	$        400,000.00	$        800,000.00
Setting Up Equipment	$        240,000.00	$        720,000.00
Purchasing Materials	$        200,000.00	$        400,000.00
Receiving Goods	$        150,000.00	$        250,000.00
Paying Suppliers	$        100,000.00	$        200,000.00
Providing Facility Space	$          50,000.00	$        150,000.00
Net Income	$ 18,275,000.00	$ 15,725,000.00

Working Note-

Activity	Cost Driver	Total Cost	Nos for Basic	Nos for Deluxe	Total	Cost per driver	Basic	Deluxe
Maintaining Equipment	Machine Hours	$                           1,140,000.00	1,000.00	3,000.00	4,000.00	285.00	$ 285,000.00	$ 855,000.00
Engineering Support	Engineering Support	$                           1,200,000.00	1,500.00	4,500.00	6,000.00	200.00	$ 300,000.00	$ 900,000.00
Material Handling	Material Handling (Number of Moves)	$                           1,200,000.00	2,000.00	4,000.00	6,000.00	200.00	$ 400,000.00	$ 800,000.00
Setting Up Equipment	Equipment Setups (Number of Setups)	$                               960,000.00	20.00	60.00	80.00	12,000.00	$ 240,000.00	$ 720,000.00
Purchasing Materials	Purchasing (Number of Orders)	$                               600,000.00	100.00	200.00	300.00	2,000.00	$ 200,000.00	$ 400,000.00
Receiving Goods	Receiving (Orders Processed)	$                               400,000.00	300.00	500.00	800.00	500.00	$ 150,000.00	$ 250,000.00
Paying Suppliers	Paying Suppliers (Invoices Processed)	$                               300,000.00	250.00	500.00	750.00	400.00	$ 100,000.00	$ 200,000.00
Providing Facility Space	Machine Hours	$                               200,000.00	1,000.00	3,000.00	4,000.00	50.00	$    50,000.00	$ 150,000.00

  

3) The Main Difference Between both the accounting Systems is the way overhead is allocated to different Products. In the given Problem first we allocated Overhead cost as per the direct labor hours which is more globally and then overhead was allocated with more specific Activity. We can See Overhead cost was 3,000,000 each for Basic and Deluxe when allocated as per direct labor hour and when we allocated activity wise we got a Correct Allocated where overhead allocated for basic Product  is 1,725,000 and Delux Product is 4,275,000.