Question

THIS IS A MULTI-STEP PROBLEM

Perdon Corporation manufactures safes—large mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The following information relates to overhead.

Units planned for production Material moves per product line Purchase orders per product line Direct labor hours per product line Mobile Safes 200 300 450 800 Walk-In Safes 50 200 350 1,700

VideoPlus, Inc. manufactures two types of DVD players, a deluxe model, and a standard model. Annual production is 50,000 units for the deluxe and 20,000 units for the standard. Both require 2 hours of direct labor for completion. Therefore, the total annual direct labor hours are 140,000 [2 hrs. × (20,000 + 50,000)]. The expected annual manufacturing overhead is $1,050,000. Thus, the predetermined overhead rate is $7.50 ($1,050,000 ÷ 140,000) per direct labor hour. The direct materials cost per unit is $42 (deluxe) and $11 (standard) model. The direct labor cost is $18 per unit for both the deluxe and standard models. The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

*** I HAVE DONE MAJORITY OF THE WORK BELOW. I AM NOT SURE IF IT IS CORRECT. ANY INSIGHT IS HELPFUL***

Instructions

(a) Under traditional product costing, compute the total unit cost of both products. Prepare a comparative schedule of the individual costs by product.

(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).

(c) Prepare a schedule assigning each activity’s cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding to the nearest cent.)

(d)        Compute the total cost per unit for each product under ABC.

(f)   Comment on:

(1) the comparative overhead cost per unit for the two products under ABC, and

(2) the comparative total costs per unit under traditional costing and ABC.

Answer 1

Answer is given below for both questions.

a) Traditional Overhead rate-Labor hour based Total Overheads $260,000 Total Direct labor hours 2,500 $104.00 Per direct labor hour Direct labor hours Direct labor hour rate Total Overhead allocated Total output al) Overhead cost per unit Mobile Safes 800 $104.00 $83,200 A 200 B $416.00 A/B Direct labor hours Direct labor hour rate Total Overhead allocated Total output a2) Overhead cost per unit Walk-in Safes 1,700 $104.00 $176,800A 50 B $3,536.00 A/B b) Activity Based Costing Materials Handling Cost Calculation of Activity rates Activity Total Overheads $160,000 Total Activities Activity rate Material handling cost $320.00 per material move 1a) Material handling costs: Material moves Material move activity rate Total Overhead allocated Total output Material cost rate per unit Mobile Safes 300 $320.00 $96,000 A 200 B $480.00 A/B 1b) Material moves Material move activity rate Total Overhead allocated Total output Material cost rate per unit Walk-in Safes 200 $320.00 $64,000 A 50 B $1,280.00 A/B Purchasing Activity Costs Calculation of Activity rates Activity Activity rate Total Overheads $100,000 Total Activities 800 Purchasing activity cost $125.00 per purchase order 2a) Purchasing Activity costs: Purchase orders Purchasing activity cost driver rate Total Overhead allocated Total output Purchasing activities cost rate per unit) Mobile Safes 450 $125.00 $56,250 A 200 B $281.25 A/B 2b) Material moves Material move activity rate Total Overhead allocated Total output Purchasing activities cost rate per unit Walk-in Safes 350 $125.00 $43,750 A 50 B $875.00 A/B c) ABC Costing Comparison : Traditional Vs Activity Based Costing Traditional UNIT Costs Costing Mobile Safe $416.00 Walk-in Safe $3,536.00 $761.25 $2,155.00 working note: Mobile Safe Material cost rate per unit Purchasing activities cost rate per unit Total Cost under ABC method $480.00 $281.25 $761.25 Walk-in Safe Material cost rate per unit Purchasing activities cost rate per unit Total Cost under ABC method $1,280.00 $875.00 $2,155.00

Question No.2

Traditional Plant wise Overhead rate Total Overheads $1,050,000 Total Direct labor hours 140,000 000 $7.50 per direct labor hour Traditional Costing ABC Costing Direct Material Direct Labor Overhead Total cost per unit Standard Model $11.00 $18.00 $15.00 $44.00 Deluxe Model $42.00 $18.00 $15.00 $75.00 b) ABC - Cost driver rate Activity Purchasing Receiving Assembling Testing Finishing Packing and shipping Total Estimated Overheads 126,000 30,000 444,000 115,000 140,000 195,000 1,050,000 Total Activities 400 20,000 74,000 23,000 70,000 80,000 Activity rate $315.00 $1.50 $6.00 $5.00 $2.00 $2.44 For Total activities see working note below c) Allocation of Overheads as per ABC Standard Model Activity cost pool Expected use of Cost Drivers Overhead Rate $315.00 $1.50 $6.00 Purchasing Receiving Assembling Testing Finishing Packing and shipping Total assigned cost Units produced Overhead cost per unit 100 4,000 20,000 10,000 20,000 18,000 Deluxe Model Expected Overhead Cost assigned use of Cost Cost assigned Rate Drivers $31,500 300 $315.00 $94,500 $6,000 16,000 $1.50 $24,000 $120,000 54,000 $6.00 $324,000 $50,000 13,000 $5.00 $65,000 $40,000 50,000 $2.00 $100,000 $43,875 62,000 $2.44 $151,125 $291,375 $758,625 20,000 50,000 $14.57 $15.17 $5.00 $2.00 $2.44 ABC Costing Direct Material Direct Labor Overhead Total cost per unit Standard Model $11.00 $18.00 $14.57 $43.57 Deluxe Model $42.00 $18.00 $15.17 $75.17 A Comparative overhead cost Standard Model Traditional method $15.00 ABC method $14.57 Deluxe Model $15.00 $15.17 Under traditional method the overhead allocated on labor hour basis is equal to both the products. The reason being both products consumed same labor hours per unit that is 2 labor hours. But in ABC costing the allocation is based on activities consumed. Hence there is variation in cost per unit Deluxe model consumes more activities than Standard model hence overhead cost per unit is more for Deluxe model Comparative total cost Standard Model $44.00 $43.57 Deluxe Model $75.00 $75.17 Traditional method ABC method Standard model is over costed as per traditional method mainly due to higher overheads charged to it based on direct labor hour basis Deluxe Model is under costed as per traditional method but in ABC method its product is higher due to higher consumption of activities