Question

Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow: Direct Labor- Hours per Unit 3.0 1.4 Annual Production 2,000 units 15,000 units Model N 800 XL Model N 500 Total Direct Labor-Hours 6,000 21,000 27,000 Additional information about the company follows: a. Model N 800 XL requires $80 in direct materials per unit, and Model N 500 requires $35. b. The direct labor wage rate is $23 per hour. c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products. d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows: Activity Cost Pool Machine setups Special processing General factory Activity Measure Number of setups Machine-hours Direct labor- hours Estimated Overhead Cost $ 460,000 215,000 1,485,000 $2,160,000

Answer 1

Req 1A - Predetermined overhead rate using direct labor hours as a basis: $80.00 per DLH (direct labor hour)

Activity	Estimated cost
Machine setups	$      4,60,000.00
Special processing	$      2,15,000.00
General factory	$    14,85,000.00
TOTAL OVERHEAD COST (A)	$    21,60,000.00
TOTAL DIRECT LABOR HOURS (B)	27000
OVERHEAD RATE (A) ÷ (B)	$                  80.00

Req 1B - Unit product cost of each model when overhead costs are allocated based on direct labor hours:

Model N 800 XL	$ 389.00
Model N 500	$          179.20

Costs	Model N 800 XL	Model N 500
Direct materials	$                      80.00	$                                35.00
Direct labor (wages)	$                      69.00 (3 hours X $23 per hour)	$                                32.20 (1.4 hours X $23 per hour)
Overhead Costs (based on direct labor hours per unit)	$                    240.00 (3 hours X $80 per hour)	$                             112.00 (1.4 hours X $80 per hour)
Total cost per unit	$                    389.00	$                             179.20

Extra: Unit product cost using ABC method:

Activity	Estimated cost (A)	Recommended cost driver	Estimated cost driver activity (B)	Cost allocation rate (A) ÷ (B)
Machine setups	$            4,60,000	Number of setups	400	$         1,150.00
Special processing	$            2,15,000	Machine hours	20,000	$               10.75
General factory	$          14,85,000	Direct labor hours	27,000	$               55.00
	$          21,60,000

Costs	Model N 800 XL	Model N 500
Direct materials	$                      80.00	$                                35.00
Direct labor (wages)	$                      69.00	$                                32.20
Overhead Costs (based on ABC allocation)	$                    330.00	$                             100.00
Total cost per unit	$                    479.00	$                             167.20

Account	Model N 800 XL	Model N 500	Total
● Machine setups
Number of setups	100	300
Cost allocation rate	$            1,150.00	$            1,150.00
Total costs	$      1,15,000.00	$      3,45,000.00	$      4,60,000.00
Special processing
Machine hours	20,000	-
Cost allocation rate	$                  10.75	$                  10.75
Total costs	$      2,15,000.00	$                         -	$      2,15,000.00
General factory
Direct labor hours	6,000	21,000
Cost allocation rate	$                  55.00	$                  55.00
Total costs	$      3,30,000.00	$    11,55,000.00	$    14,85,000.00
Total Overhead costs (a)	$      6,60,000.00	$    15,00,000.00	$    21,60,000.00
Number of units produced (b)	2000.00	15000.00
Overhead costs per unit (a)/(b)	$                330.00	$                100.00

• Activity Based Costing is costing technique wherein overhead costs are assigned to activities based on the resource consumption by each activity to form a cost pool.
• These activity costs are then allocated to each unit of product produced based on the activity used by the product.
• Each activity will have an activity cost allocation rate.
• Activity allocation Rate = Total costs incurred for the activity ÷ Activity cost driver
• Activity cost driver is any factor that will cause a change in the activity cost.