Question

Drivers and Product-Costing Accuracy McCourt Company produces two types of leather purses: standard and handcrafted. Both purses use equipment for cutting and stitching. The equipment also has the capability of creating standard designs. The standard purses use only these standard designs. They are all of the same size to accommodate the design features of the equipment. The handcrafted purses can be cut to any size because the designs are created manually. Many of the manually produced designs are in response to specific requests of retailers. The equipment must be specially configured to accommodate the production of a batch of purses that will receive a handcrafted design. McCourt Company assigns overhead using direct labor dollars. Muggs Clark, sales manager, is convinced that the purses are not being costed correctly. To illustrate his point, he decided to focus on the expected annual setup and machine-related costs, which are as follows: Setup equipment Depreciation $45,000 50,000 55,000 Operating costs Computed on a straight line basis; book value at the beginning of the year was $250.000 The machine has the capability of supplying 250,000 machine hours over its remaining life. Muggs also collected the expected annual prime costs for each purse, the machine hours, and the expected production (which is the normal output for the company). Direct labor Direct materials Standard Purse $30,000 $30,000 7,500 45,000 Units Handcrafted Purse $90,000 $30,000 7,500 5,000 100 500 Machine hours Number of setups 100 Setup time 1,000 hes hrs.

Answer 1

1.

Yes

2.

Plantwide overhead rate = Estimated total overhead / Estimated direct labor dollars

Plantwide overhead rate = $150,000 (45,000+50,000+55,000) / $120,000 (30,000+90,000)

Plantwide overhead rate = 125%

Unit overhead cost:

Standard = $30,000*125% / 7,500 = $5 per purse

Handcrafted = $90,000*125% / 7,500 = $15 per purse

Yes.

3.

Overhead rates:

Setup activity = $45,000/1,500 = $30 per setup hour

Machining activity = $105,000/50,000 = $2.1 per machine hour

Unit overhead cost:

Standard = (1,000*$30 + 45,000*$2.1) / 7,500

Standard = $30,000+94,500 / 7,500 = $16.6 per purse

Handcrafted = (500*$30 + 5,000*$2.1) / 7,500

Handcrafted = $15,000+10,500 / 7,500 = $3.4 per purse

Setup hours

Yes