Question

Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the company's products follows. Standard: Estimated production volume, 3,000 units Direct-material cost, $25 per unit Direct labor per unit, 3 hours at $12 per hour Enhanced Estimated production volume, 4,000 units Direct-material cost, $40 per unit Direct labor per unit 4 hours at $12 per hour Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow. Machine Hours Worked 18,000 22,000 40.000 Orders Processed 300 200 500 Standard Enhanced Total Inspection Hours 2.000 8.000 10.000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed-machinery that was expected to produce significant operating efficiencies Required: 1. Assuming use of direct-labor hours to apply overhead to production, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained. htu.hased costing, compute the unit manufacturing costs of the Standard and Enhanced products if the

Answer 1

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Ontario
Answer a
Calculation of Predetermined OH Rate	Standard	Enhanced	Total	Note
Units produced	3,000.00	4,000.00		A
Labor Hour Per unit	3.00	4.00		B
Total Labor Hours	9,000.00	16,000.00	25,000.00	C=A*B
Total overhead			800,000.00	D
Predetermined OH Rate			32.00	E=C/D
Allocated OH per unit	96.00	128.00		F=E*B

Calculation of Direct Labor cost per unit	Standard	Enhanced	Note
Labor Hour Per unit	3.00	4.00	See B
Labor Hour rate	12.00	12.00	P
Direct Labor cost per unit	36.00	48.00	Q=B*P
Answer 1
Product cost- Current Costing System	Standard	Enhanced	Note
Direct Materials	25.00	40.00
Direct Labor	36.00	48.00	See Q
Allocated OH per unit	96.00	128.00	See F
Product cost	121.00	168.00

Calculation of ABC rates for overhead		G	H	I	J=H+I	K=G/J
			Activity usage	ABC rates
Activity cost pool	Activity Measure	Cost	Standard	Enhanced	Total
Order Processing	Number of Order Processed	150,000.00	300.00	200.00	500.00	300.00
Machine Processing	Machine Hours	560,000.00	18,000.00	22,000.00	40,000.00	14.00
Product Inspection	Inspection Hours	90,000.00	2,000.00	8,000.00	10,000.00	9.00
Total Cost assigned		800,000.00

		See K	See H	L=K*H	See I	M=K*I
Allocation table			Standard	Enhanced
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Material Depreciation	Total Machine Hours	300.00	300.00	90,000.00	200.00	60,000.00
Set Up labor	Total Production runs	14.00	18,000.00	252,000.00	22,000.00	308,000.00
Material Handling	Number of units	9.00	2,000.00	18,000.00	8,000.00	72,000.00
Total Cost assigned				360,000.00		440,000.00	N
Units produced				3,000.00		4,000.00	See A
Costs per unit				120.00		110.00	O=N/A

Answer 2
Product cost- ABC System	Standard	Enhanced	Note
Direct Materials	25.00	40.00
Direct Labor	36.00	48.00
Allocated OH per unit	120.00	110.00	See O
Product cost	145.00	150.00
Answer 3 a	Standard	Enhanced
Product cost- Current Costing System	121.00	168.00
Product cost- ABC System	145.00	150.00
Difference	(24.00)	18.00
Remarks- if direct labor hours base is used	Under costed	Over costed

Answer 3 b

Yes it is possible that cost distortion may be the reason for profit woes of the company. Because selling price is decided on the basis of cost. So if cost is less than selling price is less which automatically reduces the profit.