Question

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 information shown below relates to overhead. Mobile Safes Walk-In Safes Units planned for production Material moves per product line 240 Purchase orders per product line 360 Direct labor hours per product line 1,710

Answer 1

1	Traditional method
	One Mobile Safe	$                      397.96
	One Walk - in Safe	$                  3,675.60
	Workings:
		Mobile Safes	Walk - in Safes	Total
(i)	Direct labor hours per product line	810	1710	2520
(ii) = (260000/2520) * (i)	Estimated manufacturing overhead	$                      83,571	$                         1,76,429	$ 2,60,000
(iii)	Units planned for production	210	48
(ii) / (iii)	Manufacturing overhead cost per unit	$                      397.96	$                         3,675.60
2	Activity based costing
(a)	One Mobile Safe	$                      683.10
(b)	One Walk - in Safe	$                  2,428.09
	Workings:
		Mobile Safes	Walk - in Safes	Total
(i)	Material moves per product line	290	240	530
(ii)= ($174000/530)*(i)	Material handling cost	$                      95,208	$                            78,792	$ 1,74,000
(iii)	Purchase order per product line	460	360	820
(iv)=($86000/820)*(iii)	Purchase activity cost	$                      48,244	$                            37,756	$     86,000
(v) = (ii) + (iv)	Estimated manufacturing overhead	$                  1,43,451	$                         1,16,549	$ 2,60,000
(vi)	Units planned for production	210	48
(v) / (vi)	Manufacturing overhead cost per unit	$                      683.10	$                         2,428.09
3		Traditional costing	Activity based costing
	Mobile Safe	$                      397.96	$                            683.10
	Walk - in Safe	$                  3,675.60	$                         2,428.09

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