Question

Product-Costing Accuracy, Plantwide and Departmental Rates, ABC

Escuha Company produces two type of calculators: scientific and business. Both products pass through two producing departments. The business calculator is by far the most popular. The following data have been gathered for these two products:

	Product-Related Data
	Scientific	Business
Units produced per year	78,000	780,000
Prime costs	$247,000	$2,470,000
Direct labor hours	96,500	965,000
Machine hours	53,000	530,000
Production runs	100	150
Inspection hours	2,000	3,000
Maintenance hours	2,250	9,000

	Department Data
	Department 1	Department 2
Direct labor hours:
Scientific calculator	72,400	24,100
Business calculator	115,800	849,200
Total	188,200	873,300
Machine hours:
Scientific calculator	25,600	27,400
Business calculator	389,120	140,880
Total	414,720	168,280
Overhead costs:
Setup costs	$214,000	$214,000
Inspection costs	165,000	165,000
Power	231,000	151,000
Maintenance	191,000	281,500
Total	$801,000	$811,500

Required:

1. Compute the overhead cost per unit for each product using a plantwide, unit-based rate using direct labor hours. Round your calculations and answers to the nearest cent.

Plantwide rate	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

2. Compute the overhead cost per unit for each product using departmental rates. In calculating departmental rates, use machine hours for Department 1 and direct labor hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per machine hour
Department 2	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

Repeat using direct labor hours for Department 1 and machine hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per direct labor hour
Department 2	$ per machine hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

3. Compute the overhead cost per unit for each product using activity-based costing. Round your calculations and answers to the nearest cent.

	Overhead Cost
Scientific	$ per unit
Business	$ per unit

Answer 1

Solution

Escuha Company

1. Computation of the overhead cost per unit for each product using a plantwide, unit-based rate using direct labor hours:

Plantwide rate	$ per direct labor hour
Overhead cost per unit:
Scientific	$1.88 per unit
Business	$1.88 per unit

Computations:

Plantwide overhead rate = total overhead costs/direct labor hours

Total overhead cost = department 1 costs + department 2 costs

= $801,000 + 811,500 = $1,612,500

Total direct labor hours = department 1 DLH + department 2 DLH

= 188,200 + 873,300 = 1,061,500

Plandwide overhead rate = $1,612,500/1,061,500 = $1.52 per DLH

Overhead cost assigned = plantwide overhead rate x DLH used

Scientific Calculator –

Direct labor hours = 72,400 + 24,100 = 96,500

Overhead cost assigned = $1.52 x 96,500 = $146,591

Number of units = 78,000

Overhead cost per unit = $146,591/78,000 = $1.88

Business Calculator –

Direct labor hours = 965,000

Overhead cost assigned = $1.52 x 965,000 = $1,465,909

Number of units = 780,000

Overhead cost per unit = $1,465,909/780,000 = $1.88

2. Computation of the overhead cost per unit for each product using a plantwide, unit based rate using department rates:

Department 1 – Machine hours; Department 2 – Direct labor hours

Department Rates
Department 1	$1.93 per MH
Department 2	$0.93 per DLH
Overhead Cost per Unit
Scientific	$0.92
Business	$1.97

Computations:

Department 1-

Total overhead costs = $801,000

Total machine hours = 414,720

Overhead rate per MH = $801,000/414,720 = $1.93

Department 1 overhead cost assigned to

Scientific Calculator –

MH = 25,600

Overhead rate = $1.93

Assigned overhead cost = $1.93 x 25,600 = $49,444

Number of units = 78,000

Department 1 overhead cost per unit = $0.63

Business Calculator –

MH = 389,120

Overhead rate = $1.93

Assigned overhead cost = $1.93 x 389,120 = $751,556

Number of units = 780,000

Department 1 overhead cost per unit = 751,556/780,000 = $0.96

Department 2-

Total overhead costs = $811,500

Total direct labor hours = 873,300

Overhead rate per DLH = $811,500/873,300 = $0.93

Department 2 overhead cost assigned to

Scientific Calculator –

DLH = 24,100

Overhead rate = $0.93

Assigned overhead cost = $0.93 x 24,100 = $22,395

Number of units = 78,000

Department 2 overhead cost per unit = 22,395/78,000 = $0.29

Business Calculator –

DLH = 849,200

Overhead rate = $0.93

Assigned overhead cost = $0.93 x 849,200 = $789,105

Number of units = 780,000

Department 2 overhead cost per unit = 789,105/780,000 = $1.012

Total overhead cost per unit –

Scientific Calculator -
department 1 = $0.63

Department 2 = $0.29

Total overhead cost per unit = $0.92

Business Calculator –

Department 1 = $0.96

Department 2 = $1.012

Total overhead cost per unit = $1.97

Computation of the overhead cost per unit for each product using a plantwide, unit-based rate using department rates:

Department 1 – Direct labor hours;          Department 2 – Machine hours

Department Rates
Department 1	$4.26 per DLH
Department 2	$4.82 per MH
Overhead Cost per Unit
Scientific	$5.64
Business	$1.50

Computations:

Department 1-

Total overhead costs = $801,000

Total direct labor hours = 188,200

Overhead rate per MH = $801,000/188,200 = $4.26

Department 1 overhead cost assigned to

Scientific Calculator –

DLH = 72,400

Overhead rate = $4.26

Assigned overhead cost = $4.26 x 72,400 = $308,142

Number of units = 78,000

Department 1 overhead cost per unit = 308,142/78,000 = $3.95

Business Calculator –

DLH = 115,800

Overhead rate = $4.26

Assigned overhead cost = $4.26 x 115,800 = $492,858

Number of units = 780,000

Department 1 overhead cost per unit = 492,858/780,000 = $0.63

Department 2-

Total overhead costs = $811,500

Total Machine hours = 168,280

Overhead rate per MH = $811,500/168,280 = $4.82

Department 2 overhead cost assigned to

Scientific Calculator –

MH = 27,400

Overhead rate = $4.82 per MH

Assigned overhead cost = $4.82 x 27,400 = $132,132

Number of units = 78,000

Department 2 overhead cost per unit = 132,132,78,000 = $1.69

Business Calculator –

MH = 140,880

Overhead rate = $4.82 per MH

Assigned overhead cost = $4.82 x 140,880 = $679,368

Number of units = 780,000

Department 2 overhead cost per unit = 679,368/780,000 = $0.87

Total overhead cost per unit –

Scientific Calculator -
department 1 = $3.95

Department 2 = $1.69

Total overhead cost per unit = $5.64

Business Calculator –

Department 1 = $0.63

Department 2 = $0.87

Total overhead cost per unit = $1.50

3. Computation of the overhead cost per unit for each product using activity – based costing:

	Overhead cost per unit
Scientific	$5.55
Business	$1.52

Computations:

Activity	Cost	Activity Usage	Activity rate = cost/usage
Setup	$428,000	250 production runs	$1,712 per production hour
Inspection	$330,000	5,000 inspection hours	$66 per inspection hour
Power	$382,000	583,000 machine hours	$0.66 per machine hour
Maintenance	$472,500	11,250 maintenance hours	$42 per maintenance hour

Scientific Calculator
Activity	Activity Rate	Activity Usage	Cost Assigned
Setup	$1,712 per production run	100 runs	$171,200
Inspection	$66 per inspection hour	2,000 inspection hours	$132,000
Power	$0.66 per MH	53,000 MH	$34,980
Maintenance	$42 per maintenance hour	2,250 maintenance hours	$94,500
Total			$432,680
number of units			78,000
Overhead cost per unit			$5.55

Business Calculator
Activity	Activity Rate	Activity Usage	Cost Assigned
Setup	$1,712 per production run	150 runs	$256,800
Inspection	$66 per inspection hour	3,000 inspection hours	$198,000
Power	$0.66 per MH	530,000 MH	$349,800
Maintenance	$42 per maintenance hour	9,000 maintenance hours	$378,000
Total			$1,182,600
number of units			780,000
Overhead cost per unit			$1.52