Question

Koontz Company manufactures two models of industrial components-a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz's controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars): Number of units produced and sold Basic 20,000 Advanced 10,000 Total 30,000 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) $3,000,000 2,300,000 700,000 720,000 $ (20,000) $2,000,000 1,350,000 650,000 480,000 $ 170,000 $5,000,000 3,650,000 1,350,000 1,200,000 $ 150,000 Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company's Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information: Molding $ 787,500 Assemble and Pack $ 562,500 Total $1,350,000 Manufacturing overhead costs Direct labor hours: Basic Advanced Machine hours: Basic Advanced 10,000 5,000 20,000 10,000 30,000 15,000 12,000 10,000 . 12,000 10,000 Required: 1. Using the plantwide approach: a. Calculate the plantwide overhead rate. b. Calculate the amount of overhead that would be assigned to each product. 2. Using a departmental approach: a. Calculate the departmental overhead rates. b. Calculate the total amount of overhead that would be assigned to each product. c. Using your departmental overhead cost allocations, redo the controller's segmented income statement (continue to allocate selling and administrative expenses based on sales dollars). 3. Koontz's production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company's total manufacturing overhead cost to five activity cost pools as follows:

Answer 1

1
a.	Platwide overhead rate=Total manufacturing overhead cost/Total direct labor hours=1350000/(30000+15000)=1350000/45000=$ 30 per direct labor hour
b.	Overhead assigned=Direct labor hours*Predetermined overhead rate
	Basic:
	Overhead assigned=30000*30=$ 900000
	Advanced:
	Overhead assigned=15000*30=$ 450000
2
a.	Molding:
	Departmental overhead rates=Departmental overhead/Total machine hours in the department=787500/(12000+10000)=787500/22000=$ 35.80 per machine hour
	Assemble and pack:
	Departmental overhead rates=Departmental overhead/Total direct labor hours in the department=562500/(20000+10000)=562500/30000=$ 18.75 per machine hour
b.	Overhead assigned:
	Basic
	Overhead assigned=(Machine hours in molding department*Departmental overhead rate for Molding department)+(Direct labor hours in assemble and pack*Departmental overhead rate for assemble and pack department)=(12000*35.80)+(20000*18.75)=429600+375000=$ 804600
	Advanced:
	Overhead assigned=(Machine hours in molding department*Departmental overhead rate for Molding department)+(Direct labor hours in assemble and pack*Departmental overhead rate for assemble and pack department)=(10000*35.80)+(10000*18.75)=358000+187500=$ 545500
c.						Basic	Advanced	Total
	Number of units produced and sold					20000	10000	30000
						$	$	$
	Sales					3000000	2000000	5000000
	Cost of goods sold				(Note:1)	2204600	1445500	3650100
	Gross margin					795400	554500	1349900
	Selling and administrative expenses					720000	480000	1200000
	Net operating income (loss)					75400	74500	149900
	Note:1
	Cost of goods sold=Units sold*Manufacturing cost per unit:
						Basic	Advanced
	Direct materials					40	60
	Direct labor cost				(Note:2)	30	30
	Overhead cost				(Note:3)	40.23	54.55
	Total manufacturing cost per unit				a	110.23	144.55
	Units sold				b	20000	10000
	Cost of goods sold				a*b	2204600	1445500
	Note:2
	Direct labor cost=Direct labor hours per unit*Labor rate per hour
	Direct labor hours per unit=Total direct labor hours/Units produced
						Basic	Advanced
	Total direct labor hours				a	30000	15000
	Units produced				b	20000	10000
	Direct labor hours per unit				c=a/b	1.5	1.5
	Labor rate per hour				d	20	20
	Direct labor cost				c*d	30	30
	Note:3
	Overhead cost per unit=Total overhead assigned/Units produced
						Basic	Advanced
	Total overhead assigned				a	804600	545500
	Units produced				b	20000	10000
	Overhead cost per unit				a/b	40.23	54.55
3
a.	Activity rate:
	Activity cost pool		Manufacturing overhead	Activity measure				Activity measure in $	Activity rate
			a					b	a/b
	Machining		417500	Machine hours in molding				22000	18.98	Per machine hour
								(12000+10000)
	Assemble and pack		282500	Direct labor hours in assemble and pack				30000	9.42	Per direct labor hour
								(20000+10000)
	Order processing		230000	Number of customer orders			(Note:1)	250	920.00	Per order
	Setups		340000	Setup hours			(Note:2)	650	523.08	Per setup hours