Question

Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit product costs. Activity Cost Driver Assembly DL hours logged Machining Machine hours logged Setting Up Equipment Number of setups Product Movement Number of Moves Cost $500 $1,500 $1,200 $800 Each Acoustic guitar requires 1 direct labor hour and 0.5 machine hours to produce. Each Electric guitar requires 0.8 direct labor hours and 0.4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during The total per unit cost of the acoustic line under the traditional (current) system is $40. The total per unit cost for the electric line under the activity based costing (proposed) system is $28. (round to the nearest dollar) The total amount by which each product line is over/undercosted is $360.

Answer 1

Answers

B 1 a. Overhead allocation rate 2 (Total overheads/Total direct labor hours) $40.00 per direct labor hour Acoustic Line $60.00 $25.00 $40.00 $125.00 4 5 Direct materials per unit 6 Direct labor per unit 7 Overhead cost per unit 8 Total per unit cost 9 10 b. 11 Overhead allocation rates: 12 Assembly 13 Machining 14 Setting Up Equipment 15 Product Movement 16 $5.00 per direct labor hour $30.00 per machine hour $150.00 per setup $160.00 per move 17 Electric Line $70.00 $20.00 $28.40 $118 rounded to nearest dollar 18 Direct materials per unit 19 Direct labor per unit 20 Overhead cost per unit 21 Total per unit cost 22 23 c. 24 25 Overheads as per traditional method 26 Overheads as per ABC method 27 Acoustic Line $800.00 $1.160.00 $360.00 undercosted Electric Line $3,200.00 $2.840.00 ($360.00) overcosted 28

Calculations:

1 a Overhead allocation rate (Total overheads Total direct labor 2 hours) =(500+1500+1200+800X ((1.20+0.8.100) per direct labor hour 60 Acoustic Line 5 Direct materials per unit 6 Direct labor per unit =125 7 Overhead cost per unit =1°B2 8 Total per unit cost IESUM(B5:37 9 10 b. 11 Overhead allocation rates: 12 Assembly =500/(120)+(0.8 100)) per direct labor hour 13 Machining =1500 ((0.5*20)+(0.49 100) per machine hour 14 Setting Up Equipment =1200/(20/5)+(100/25)) per setup 15 Product Movement -800 (2020)+(100/25) per move 16 Electric Line 18 Direct materials per unit 70 19 Direct labor per unit =0.825 20 Overhead cost per unit (100*0.8 B12)+(100*0.4°B13)+((100/25°B14)+((100/25B15 100 21 Total per unit cost =SUM(B18:B20) rounded to nearest dollar 22 23 c. Acoustic Line Electric Line 25 Overheads as per traditional method -B720 -B2*0.8 100 26 Overheads as per ABC method =((20*1*B12)+(20*0.5*313)+((20/5*B14)+((20/20*B15) =B20*100 =B26-B25 =C26-C25 undercosted overcosted 17

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