41. Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Fine Finishing, Inc, produces a wood desk that sells for $500 and a wood table that sells for $900. Last year, total overhead costs of $6,000,000 were allocated based on direct labor costs. Direct labor costs totaled $2,000,000 last year, and the company produced 15,000 desks and 5,000 tables. Total direct labor and direct materials costs by product for last year were as follows: Desk Table Direct materials $1,575,000 $950,000 Direct labor $1,200,000 $800,000 The management of Fine Finishing, Inc., would like to use activity-based costing to allocate overhead rather than one plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs. Estimated Cost Driver Activity Estimated Overhead Costs Activity Cost Driver Desk Table Total 900 100 Number of purchase orders Number of setups Machine hours Number of inspections 240 Purchase orders Machine setups Machine maintenance Quality inspections Total 260 $ 800,000 1,600,000 2.400,000 1.200,000 $6,000,000 42,000 15,000 18,000 5,000 1.000 500 60,000 20,000
Required: a. Calculate the direct materials cost per unit and direct labor cost per unit for each product. 1. Using the plantwide allocation method, calculate the predetermined overhead rate and determine the overhead cost per unit allocated to the desk and table products. 2. Using the plantwide allocation method, calculate the product cost per unit for the desk and table products. Round results to the nearest cent. 1. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. (Hint: Step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.) 2. Using the activity-based costing allocation method, allocate overhead to each product. (Hint: This is step 5 in the activity-based costing process.) Determine the overhead cost per unit. Round results to the nearest cent. 3. What is the product cost per unit for the desk and table products? d. Calculate the per unit profit for each product using the plantwide approach and the activity-based costing approach. How much did the per unit profit change when moving from one approach to the other? e. Refer to the estimated cost driver activity provided. Calculate the percent of each activity consumed by each product (eg, the desk product issued 900 of the 1,000 purchase orders issued in total and therefore consumes 90 percent of this activity). These percentages represent the amount of overhead costs allocated to each product using activity-based costing. Using the plantwide approach, 60 percent of all overhead costs are allocated to the desk and 40 percent to the table. Compare the activity-based costing percentages to the percentage of overhead allocated to each product using the plantwide approach. Use this information to explain what caused the shift in overhead costs to the desk product using activity-based costing.
Homework Answers
a.
| Desk | Table | |
| Direct Material cost | $ 15,75,000 | $ 9,50,000 |
| Units | 15000 | 5000 |
| Direct Material cost per unit | $ 105 | $ 190 |
| Direct Labor Cost | $ 12,00,000 | $ 8,00,000 |
| Units | 15000 | 5000 |
| Direct Labor cost per unit | $ 80 | $ 160 |
b. Plantwide overhead rate = $6000000/2000000 = $3 per dollar of labor cost
| Desk | Table | |
| Overhead allocated | $ 36,00,000 | $ 24,00,000 |
| Units | 15000 | 5000 |
| Overhead cost per unit | $ 240 | $ 480 |
| Desk | Table | |
| Direct Material cost per unit | $ 105 | $ 190 |
| Direct Labor cost per unit | $ 80 | $ 160 |
| Overhead cost per unit | $ 240 | $ 480 |
| Product Cost per unit | $ 425 | $ 830 |
c.
| Activity Cost Pool | Overhead Cost | Activity Cost Driver | Activity Rate | ||
| Purchase Orders | $ 8,00,000 | 1000 | Purchase orders | $ 800.00 | per purchase order |
| Machine Setups | $ 16,00,000 | 500 | Setups | $ 3,200.00 | per setup |
| Machine Maintenance | $ 24,00,000 | 60000 | Machine hours | $ 12.50 | per machine hour |
| Quality Inspections | $ 12,00,000 | 20000 | Inspections | $ 60.00 | per inspection |
| Total Overhead Cost | $ 60,00,000 |
| Overhead Allocation | ||
| Desk | Table | |
| Purchase Orders | $ 7,20,000 | $ 80,000 |
| Machine Setups | $ 7,68,000 | $ 8,32,000 |
| Machine Maintenance | $ 16,80,000 | $ 7,20,000 |
| Quality Inspections | $ 9,00,000 | $ 3,00,000 |
| Total Overhead Cost | $ 40,68,000 | $ 19,32,000 |
| Units | 15000 | 5000 |
| Overhead cost per unit | $ 271.20 | $ 386.40 |
| Desk | Table | |
| Direct Material cost per unit | $ 105.00 | $ 190.00 |
| Direct Labor cost per unit | $ 80.00 | $ 160.00 |
| Overhead cost per unit | $ 271.20 | $ 386.40 |
| Product Cost per unit | $ 456.20 | $ 736.40 |
d.
| Traditional Costing | ||
| Desk | Table | |
| Selling Price per unit | $ 500.00 | $ 900.00 |
| Product Cost per unit | $ 425.00 | $ 830.00 |
| Profit per unit | $ 75.00 | $ 70.00 |
| ABC | ||
| Desk | Table | |
| Selling Price per unit | $ 500.00 | $ 900.00 |
| Product Cost per unit | $ 456.20 | $ 736.40 |
| Profit per unit | $ 43.80 | $ 163.60 |
| Desk | Table | |
| Change in Profit | $ -31.20 | $ 93.60 |
By using Activity Based Costing, each
overheads are allocated according to the cost drivers. For instance
Purchase order costs are allocated between Desk and Table based on
number of purchase orders during the period rather than on the
basis of direct labour. This is a more judicious allocation of
costs, as it is quite understandable that direct labour and
purchase order costs are not related. So by choosing Activity Based
Costing, The business is able to identify the actual cost of
servicing each product. Thus the total cost of Desk has increased
when costs are allocated using Activity Based Costing.
Add Answer to:
41. Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Fine Finishing, Inc, produces a wood desk that...
Quality Furniture,Inc., produces a wood desk that sells for $500 and a wood table that sells for ...
Quality Furniture,Inc., produces a wood desk that sells for $500
and a wood table that sells for $900. Last year, total overhead
costs of $6,000,000 were allocated based on direct labor costs.
Direct labor costs totaled $2,000,000 last year, and Quality
Furniture produced 15,000 desks and 5,000 tables. Total direct
labor and direct materials costs by product for the last year were
as follows:
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Table
Total
Direct materials
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950,000
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Written please
Dandy Desks Company manufactures two products: a standing desk and a portable desk. The portable desks are more complex of the two products, and they require more direct labor time and more machine time per unit than the standing desk. Activity Pool Overhead Costs Total Driver Usage Setup $768,000 9,600 setups Materials purchasing $330.000 8.250 purchase orders Machining/fabricating $408,000 81,600 machine hours Total overhead costs $1,506,000 Standing Desks Portable Desks Number of Units Produced 120,000 30,000 Direct materials...
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Problem 1: Dandy Desks Company manufactures two products: a standing desk and a portable desk. The portable desks are more complex of the two products, and they require more direct labor time and more machine time per unit than the standing desk. Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity-based costing. All overhead...
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Calculate the overhead rate using activity based costing. (Round answers to 2 decimal places, e.g. 12.25.)...
Calculate the overhead rate using activity based
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e.g. 12.25.)
Overhead rates for activity-based
costing
Cutting
$
per machine hour
Design
$
per setup
Determine the amount of overhead allocated to the wool
product line and the cotton product line using activity-based
costing.
Wool product line
Cotton
product line
Overhead Allocated
$
$
Calculate the overhead rate using traditional approach.
(Round answer to 2 decimal places, e.g.
12.25.)
Overhead rates using the...
Traditional Product Costing versus Activity-Based Costing Ridgeland Inc. makes backpacks for large sporting goods chains that...
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Quality Furniture,Inc., produces a wood desk that sells for $500
and a wood table that sells for $900. Last year, total overhead
costs of $6,000,000 were allocated based on direct labor costs.
Direct labor costs totaled $2,000,000 last year, and Quality
Furniture produced 15,000 desks and 5,000 tables. Total direct
labor and direct materials costs by product for the last year were
as follows:
Desk
Table
Total
Direct materials
1,575,000
950,000
Direct labor
1,200,000
800,000
2,000,000
Sales price
500
900...
earch this book Q Read Study AE 40. Activity-Based Costing Versus Traditional Approach. Carson Company produces a regular computer monitor that sells for $175 and a premium computer monitor that sells for $300. Last year, total overhead costs of $3,675,000 were allocated based on direct labor hours. A total of 63,000 direct labor hours were required last year to build 36,000 regular monitors (1.75 hours per unit), and 42,000 direct labor hours were required to build 12,000 premium monitors (3.50...
also, Calculate the overhead rates using the
traditional approach.
Overhead Rates using the traditional approach is.
______$___________ per direct labor hour
What amount of overhead would be allocated to the wool
and cotton product lines using the traditional approach, assuming
direct labor hours were incurred evenly between the wool and
cotton?
Overhead Allocated. for Wool Product Line is
=____$_____
Overhead Allocated. for Cotton Product Line is
=____$______
EcoFabrics has budgeted overhead costs of $1,105,650. It has allocated overhead on...
Traditional Product Costing versus Activity-Based Costing Ridgeland Inc, makes backpacks for large sporting goods chains that are sold under the customers' store brand names. The Accounting Department has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Costs Cost Driver Maximum Quantity Setup costs.......... $489,600 Number of setups............ 7,200 Ordering costs ....... 130,000 Number of orders............ 65,000 Maintenance......... 920,000Number of machine hours.... 80,000 Power ........ 88,000 Number of kilowatt hours..... 440,000 Total predicted direct labor...
Written please
Dandy Desks Company manufactures two products: a standing desk and a portable desk. The portable desks are more complex of the two products, and they require more direct labor time and more machine time per unit than the standing desk. Activity Pool Overhead Costs Total Driver Usage Setup $768,000 9,600 setups Materials purchasing $330.000 8.250 purchase orders Machining/fabricating $408,000 81,600 machine hours Total overhead costs $1,506,000 Standing Desks Portable Desks Number of Units Produced 120,000 30,000 Direct materials...
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$ Additional ABC Problems 1. Activity-Based versus Traditional Costing Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. Management believes that the accounting system is not accurately allocating costs to products and has asked you to investigate if there is a cost allocation problem. You find that manufacturing overhead costs are currently assigned to products based on their direct labor costs. For your investigation, you have data...
Calculate the overhead rate using activity based
costing. (Round answers to 2 decimal places,
e.g. 12.25.)
Overhead rates for activity-based
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Cutting
$
per machine hour
Design
$
per setup
Determine the amount of overhead allocated to the wool
product line and the cotton product line using activity-based
costing.
Wool product line
Cotton
product line
Overhead Allocated
$
$
Calculate the overhead rate using traditional approach.
(Round answer to 2 decimal places, e.g.
12.25.)
Overhead rates using the...
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