Question

cal l product using the activity rates in (a). EX 4-16 Single plantwide rate and activitybased costing Obj. 2,4 Whirlpool Corporation (WHR) conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three rep- resentative refrigerators (out of 333): one low, one medium-, and one high volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators: 38 Three Representative Number of Number of Number of Number of Refrigerators Machine Hours Setups Sales Orders Units Refrigerator-Low Volume 24 14 160 Refrigerator-Medium Volume 225 88 1,500 Refrigerator-High Volume 900 120 6,000 Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $200 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate infor- mation is assumed to be as follows: Sales Order Machining Activity Setup Activity Processing Activity Activity rate $160 $240 $55 a. Complete the following table, using the single machine hour rate to determine the per-unit fac. tory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). Round per-unit overhead to two decimal places and percents to one decimal place. COLUMNA Single Rate COLUMNB COLUMNC Overhead ABC Overhead Percent Change Allocation Allocation in Allocation Product Volume Class per Unit per Unit (Col. B-Col. A)/COLA Low Medium High b. Why is the traditional overhead rate per machine hour greater under the single-rate method than under the activity-based method? Interpret Column C in your table from part (a).

Please answer a, b and c requirements.

Answer 1

The answer is attached below.

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A. Computation of Overhead Allocation rate per Unit Under Single Rate Number of Refrigerators Machine Hours Rate per Hour Total Cost Number of Units Rate per Unit Low Volume 24 $ 200$ 4,800 160 Medium Volume 225 $ 200 $ 45,000 1,500 30 High Volume 900 $ 200 $ 180,000 6,000 | Cost B. Computation of Overhead Allocation rate per Unit Under Activity Based Model Machine Activity Setup Activity Refrigerators Number of Number of Rate per Total Mchine Hours Rate per hour Total Cost Setups setup Cost Low Volume 24 $ 160$ 3,840 14$ 240$ 3,360 Medium Volume 225 $ 160$ 36,000 13 $ 240$ 3,120 High Volume 900 $ 160$ 144,000 9 $ 240 $ 2,160 Sales order processing Total Number of Rate per Sales Orders order Total Cost 38 $ 55.00 $ 2,090$ 9,290 88 $ 55.00 $ 4,840$ 43,960 120 $ 55.00 $ 6,600 $152,760 Number Rate per of Units Unit 160 $ 58 1,500 $ 29 6,000 $ 25 (1) Comparison of Single Overhead Rate with ABC ABC Overhead Percentage Single Allocation of Change in Production Volum Overhead Rate Rate Allocation Low $ 30 $ 58 93.54% Medium $ 30$ 29 -2.31% High $ 30 $ 25 -15.13% (2) Under Traditional Overhead Rate, the rate per unit is higher in case of Medium and High as single rate is apportioned rather than based on use of activity. The setup numbers are higher in 'Low Volume', so rate per unit is higher. (3) Whirlpool corporation must apply activity based model to identify exact cost of product. It will be beneficial to decide price of product. As per Working (1) the overhead cost per unit is higher by 94% in case of 'Low' product when calculated by ABC aproach. The cost of 'Medium' and 'High' end products have lower cost per unit as per ABC approach