Question

Problem 3: Rawls Company (Overhead Allocation) The following table provides information about Rawls Company that produces two products, cell phones and tablets. Activity Cost Driver Activity level Cost Cell phones Tablets Production Setup Number of setups $180,000 10 20 Material Handling Number of parts $15,000 19 31 Packaging and shipping Number of units shipped $60,000 25,000 15,000 Total Overhead Costs $255,000 Compute the amount of overhead allocated to one tablet if ABC principles are used to allocate overhead costs (0.5 point) and discuss advantages and disadvantages using ABC method, compared to using traditional volume-based OH allocation, in this specific setting (0.5 point).

Answer 1

Ansewer) Statement showing over head allocation 1 Activity Cost Driver 2 Production setup no.of setups 3 Material Handling No.of Parts 4 Packing and shipping No.of units shipped Basis Cost 10:20 $ 1,80,000.00 19:31 $ 15,000.00 25000:15000 $ 60,000.00 Cellphones tablets Total 60000 120000 180000 5700 9300 15000 37500 22500 60000 $ 2,55,000.00 5 Total cost 6 Total units produced 7 Over head rate under ABC method (5/6) $ 1,03,200.00 25000 4.13 $ 1,51,800.00 15000 $ 10.12 where as the over head allocated to traditional method as follows Total Cost allocated on the basis of volume of produce i.e 25: 15 cost no.of units per unit Cellphones OHRR = 255000*25/40 159375 25000 6.375 Tablets OHRR = 255000*15/40 95625 15000 6.375 Note: we assumed that total units produced is equal to packing and shipping Advantages of ABC caluculation of OHRR: 1) this method used for the purpose of accurate results of ohrr can be find because it is considred as every cost driver takes into account 2) here we know the stage wise ohrr can be find using Cost driver but in Traditional method we can not find the same Disadvantages: 1) abc method is cost effective in nature 2) in some prodction process they cannot find any cost drivers 3) All cost are may not have any Cost drivers.