Question

Lillis Manufacturing makes a variety of industrial fittings. The products are similar, but not identical, and all go through the same processes. Some orders from Lillis go to companies in regions with strict environmental regulations. Lillis is required to conduct compliance tests on those orders before shipment The company produces to order and uses a job costing system. Overhead is applied to jobs based on direct labor cost. The cost analyst at Lillis recently put together an estimate of overhead for the coming year, which is shown in the following table. Amount Category Machining Assembly Setup labor Packaging Compliance testing $ 400,000 200,000 320,000 180,000 100,000 Total $1,200,000 Three jobs were started and completed in November. Details on the jobs follow Job 1101 Job 1102 Job1103 $ 5,000 $ 13,000 400 Direct materials Direct labor Number of units Direct labor hours Machine hours Production runs Compliance testing required? $ 4,000 $ 10,000 200 240 5ee 6,000 $ 16,000 500 800 360 700 2 600 1 Yes Yes No Lilis is considering adopting an activity-based costing system. The cost analyst has studied the system and has recommended the following cost drivers for each of the overhead categories. She has also estimated the annual volume for each of the cost drivers. This information follows. Overhead Category Machining Assenbly Setup labor Packaging Compliance testing Cost Driver Machine hours Direct-labor hours Production runs Annual Cost Driver Volume 20,000 machine-hours 16,000 direct-labor hours 80 production runs 120,000 units Units Orders tested 20 orders tested The average direct labor rate at Lillis is $25 per hour

Answer 1

A. Computation of overhead rate under current costing system: :-
	Total Estimated Overheads Costs			$1,200,000
	Direct labor costs	16000 *$ 25	=	$400,000
	Plantwide overhead rate		=	Total Estimated Overheads Costs
				Direct labor costs
			=	$1,200,000
				$400,000
			=	$3.00	per $ of Direct labor cost
B. Computation of Overhead Cost Per unit:-
	Product	Direct labor costs	Plantwide OH Rate		Overhead Cost Assigned
	a	b	c		d = b×c
	Job 1101	$10,000	$3.00	per $ of Direct labor cost	$30,000
	Job 1102	$16,000	$3.00	per $ of Direct labor cost	$48,000
	Job 1103	$13,000	$3.00	per $ of Direct labor cost	$39,000
C. Determination of unit cost of of jobs under current costing system:-
			Job 1101	Job 1102	Job 1103
			Total	Total	Total
	Direct Material Cost		$                    4,000	$                        6,000	$                                   5,000
	Direct labor Cost		$                 10,000	$                     16,000	$                                13,000
	Overhead Cost		$                 30,000	$                     48,000	$                                39,000
	Manufacturing Cost		$                 44,000	$                     70,000	$                                57,000
	No. of units		200	500	400
	Unit Cost		$                 220.00	$                     140.00	$                                142.50

1. Computation of activity overhead rates under ABC:-
Activity Cost pool	Estimated Overhead Cost	Activity Drivers		Activity rate
a	b	c		d =b/c
Machining	$400,000	20,000	Machine hours	$20.00	per machine hour
Assembly	$200,000	16,000	Direct labor hours	$12.50	per direct labor hour
Setup labor	$320,000	80	Production runs	$4,000.00	per production run
Packaging	$180,000	120,000	Units	$1.50	per unit
Compliance Testing	$100,000	20	Orders tested	$5,000.00	per order tested
Total Manufacturing Overhead Cost	$ 1,200,000

2. Computation of Overhead Cost assigned to each product line:-
		Activity Overhead Rates	Job 1101		Job 1102		Job 1103
			Cost driver incurred	Overhead assigned	Cost driver incurred	Overhead assigned	Cost driver incurred	Overhead assigned
	a	b	c	d = b*c	e	f = b*e	e	f = b*e
	Machining	$20.00	500	$10,000	700	$14,000	600	$12,000
	Assembly	$12.50	240	$3,000	800	$10,000	360	$4,500
	Setup labor	$4,000.00	1	$4,000	2	$8,000	1	$4,000
	Packaging	$1.50	200	$300	500	$750	400	$600
	Compliance Testing	$5,000.00	1	$5,000	-	$0	1	$5,000
	Total Cost assigned			$22,300		$32,750		$26,100

3. Determination of unit cost of of jobs under ABC costing system:-
			Job 1101	Job 1102	Job 1103
			Total	Total	Total
	Direct Material Cost		$                    4,000	$                        6,000	$                                   5,000
	Direct labor Cost		$                 10,000	$                     16,000	$                                13,000
	Overhead Cost		$                 22,300	$                     32,750	$                                26,100
	Manufacturing Cost		$                 36,300	$                     54,750	$                                44,100
	No. of units		200	500	400
	Unit Cost		$                 181.50	$                     109.50	$                                110.25
			Unit Cost
			Job 1101	Job 1102	Job 1103
	Using the current costing system		$                 220.00	$                     140.00	$                                142.50
	Using the ABC system		$                 181.50	$                     109.50	$                                110.25

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated.
Thank you.