Question

Cost Driver Number of orders Number of production runs Pounds of materials used Cost $ 48,375 170,000 336,000 Driver Activity 225 orders 100 runs 120,000 pounds Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Machine-hours Number of inspections Number of units 252,000 51,200 120,000 $977,575 14,000 hours 40 inspections 480,000 units In addition, management estimated 7,300 direct labor-hours for year 2. Assume that the following cost driver volumes occurred in January, year 2. Institutional 60,000 $38,000 450 11 Standard 21,000 $ 25,000 400 Silver 10,000 $ 15,000 630 7 9 Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Pounds of material Machine-hours Number of inspections Units shipped 14,000 560 6,000 160 2,600 80 60,000 21,000 10,000 Actual labor costs were $15 per hour. Required: a. (1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. (2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2). c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Answer 1

Solution a1:

5 Usage of Activity Base Activity Rate Determination of activity rate for each activity Activity Estimated Overhead Cost Activity Base 6 Processing orders $48,375.00 Nos of production runs 7 Setting up production $170,000.00 Nos of orders 8 Handling materials $336,000.00 Pound of materials Machine depreciation and maint $252,000.00 Machine hours 10 Performing quality control $51,200.00 Nos of inspections 11 Packing $120,000.00 Units shipped 12 13 Total $977,575.00 225 100 120000 14000 40 480000 $215.00 $1,700.00 $2.80 $18.00 $1,280.00 $0.25 35 36 38 48 50 51 eet44 Sheet107 (67)) Sheet16 Sheet574 (2) Sheet574 (5)

Solution a2:

Predetermined overhead rate using direct labor hours = $977575/ 7300 = $133.91438

Solution b:

W 16 Computation of Production Cost - Using Predetermined overhead rate based on direct labor hours For february Particulars Institutional Standard Direct materials costs $38,000.00 $25,000.00 Direct labor cost (direct labor hours* $15) $6,750.00 $6,000.00 Manufacturing overhead (labor hours *$133.91438) $53,565.75 17 Silver $15,000.00 $9,450.00 $84,366.06 18 19 20 Production Cost $105,011.477 $84,565.75 $108,816.06 22 23 24 25 26 29 30 31 32 33 Bet44 Sheet107 (67)) Sheet16 Sheet574 (2) Sheet574 (5) Sheet598 Sheet36 Sheet39

Solution c:

K м. NO Allocation of Overhead to Products Institutional Standard Silver Activity Activity Rate Usage Allocated Costs Usage Allocated Costs Usage Allocated Costs Processing orders $215.00 11 $2,365.00 9 $1,935.00 7 $1,505.00 Setting up production $1,700.00 $6,800.00 4 $6,800.00 5 $8,500.00 Handling materials $2.80 14000 $39,200.00 6000 $16,800.00 2600 $7,280.00 Machine depreciation and mainter $18.00 560 $10,080.00 160 $2,880.00 80 $1,440.00 Performing quality control $1,280.00 $3,840.00 2 $2,560.00 3 $3,840.00 Packing | $0.25 60000 $15,000.00 21000 $5,250.00 10000 $2,500.00 9 10 11 12 13 Total $77,285.00 $36,225.00 $25,065.00 14 16 17 18 19 20 21 22 23 24 eet44 Sheet107 (67)) Sheet16 Sheet574 (2) Sheet574 (5) Sheet598 ) Sheet36 ) Sheet39

S U V W 36 37 38 39 40 41 43 44 Computation of Production Cost - Activity Based Costing For february Particulars Institutional Standard Direct materials costs $38,000.00 $25,000.00 Direct labor cost (direct labor hours *$15) $6,750.00 $6,000.00 Manufacturing overhead $77,285.00 $36,225.00 Silver $15,000.00 $9,450.00 $25,065.00 46 47 48 Production Cost $122,035.00 $67,225.00 $49,515.00 49 51 52 53 54 55 56 Bet44 Sheet107 (67)) Sheet16 Sheet574 (2) Sheet574 (5) Sheet598 ) Sheet36 ) Sheet39