Question

OBJECTIVE CORNERSTONE 4.3 Exercise 4.15 Drivers and Product-Costing Accuracy McCourt Company produces two types of leather purses: standard and handcrafted. Both purses use equipment for cutting and stitching. The equipment also has the capability of creating standard designs. The standard purses use only these standard designs. They are all of the same size to accommodate the design features of the equipment. The handcrafted purses can be cut to any size because the designs are created manually. Many of the manually produced designs are in response to specific requests of retailers. The equipment must be specially configured to accommodate the production of a batch of purses that will receive a handcrafted design. McCourt Company assigns overhead using direct labor dollars. Muggs Clark, sales manager, is convinced that the purses are not being costed correctly. To illustrate his point, he decided to focus on the expected annual setup and machine-related costs, which are as follows: Setup equipment $45,000 Depreciation 50,000 Operating costs 55,000 Computed on a straight-line basis; book value at the beginning of the year was $250,000 100 The machine has the capability of supplying 250,000 machine hours over its remaining life. Muggs also collected the expected annual prime costs for each purse, the mad the expected production (which is the normal output for the company). Standard Purse Handcrafted Purse Direct labor $30,000 $90,000 Direct materials $30,000 $30,000 Units 7,500 7,500 Machine hours 45,000 5,000 Number of setups 100 Setup time 1,000 hrs. 500 hrs. Required: 1. Do you think that the direct labor costs and direct materials costs are accurately traced to each type of purse? Explain. 2. The controller has suggested that overhead costs be assigned to each product using a plant- wide rate based on direct labor dollars. Machine costs and setup costs are overhead costs. Assume that these are the only overhead costs. For each type of purse, calculate the over head per unit that would be assigned using a direct labor dollars overhead rate. Do you think that these costs are traced accurately to each purse? Explain. 3. Now calculate the overhead cost per unit per purse using two overhead rates: one for the setup activity and one for the machining activity. In choosing a driver to assign the setun costs, did you use number of setups or setup hours? Why? As part of your explanation define transaction and duration drivers. Do you think machine costs are traced accurately to each type of purse? Explain.

Answer 1

Answer 1 - Yes - Direct Labour and Direct Material cost are acurately traced

Answer 2 -

As below

	Mccourt Comoany produces Two tyoes of leater Purse - Standard + Handcraft
Answer 2	Annual Set up and Machine related cost
	Setup Equipment $	45,000
	Depreciation $	50,000	( staright Lien basis calculation )
	Operating Cost $	55,000
	Total OH cost $-a	1,50,000
	Total Direct Labour cost	Amnt($)
	Standard Purse	30,000
	Handcrafted Purse	90,000
	Total Direct Labour cost-b	1,20,000.00
	Rate dertermined on Labour (a/b)	1.25
	With help of above rate , need to determined
	Overhead applied	Amnt($)-a	Rate Per -b	Overhead applied ($)-(a*b)=c	Unit Production -d	Overhead applied ($) per unit (c/d)
	Standard Purse	30,000.00	1.25	37,500	7,500.00	5.00
	Handcrafted Purse	90,000.00	1.25	1,12,500	7,500.00	15.00

Standard Purse - OH rate - $ 5/ purse

Handicraft - OH rate $ 15 / purse

Answer 3

Answer 3	In this section , we need to find out separate workings relates to
		Cost ( $)		Cost ( $)
	Set up Time	45,000	Machine Time	1,05,000
	Set Up time -Hr	1500	(Depreciation+ Operating coat)-$50000+$55000
	( Standard + Handicraft)
	Rate $/ Hr	30
	Machine Hr(45000+5000)			50,000
	( Standard + Handicraft)
	Rate $/ Hr			2.10
		Standard ($)			Handicraft ($)
		Hr-a	Rate / Hr-b	Cost($)(a*b)	Hr	Rate / Hr	Cost($)
	Set up	1,000	30	30,000	500	30	15,000
	Machine	45,000	2	94,500	5,000	2	10,500
	Total Overhead applied			1,24,500			25,500
	Number of unit ( as per Question)			7,500			7,500
	Rate$ / Unit			16.60			3.40