Question

Baird Electronics produces video games in three market categories: commercial, home, and miniature. Baird has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	680,800		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			631,100		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			211,400		Research and development	Time spent by research department
Facility			466,400		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

     
Additional data for each of the product lines follow:     

	Commercial				Home				Miniature				Total
Direct materials cost	$	36.20	/unit		$	23.70	/unit		$	30.50	/unit			—
Direct labor cost	$	13.60	/hour		$	13.60	/hour		$	19.10	/hour			—
Number of labor hours		6,100				11,300				2,300				19,700
Number of machine hours		20,000				41,000				13,000				74,000
Number of production orders		300				2,100				500				2,900
Research and development time		14	%			23	%			63	%			100	%
Number of units		13,000				49,000				12,000				74,000
Square footage		23,000				54,000				11,000				88,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

Answer 1

Solution :-a.) 1. Calculation of allocation of Total Overhead Costs to each product line using Direct labor hours as allocation base : - Total Overhead Costs $1,989,700 Commercial Home Miniature Particulars Direct Labor Hrs (Cost Driver) 6100 113001 23001 - Overhead Costs Assigned $616,100.00 $1,141,300.00 $232,300.00 ($ 1989700 *6100 Hrs) / 19700 Hrs ($ 1989700 *11300 Hrs) / 19700 Hrs ($ 1989700*2300 Hrs) / 19700 Hrs OHN 3 2. Calculation of Total cost for each product using Traditional costing system: 5 Particulars 5 Direct Material Costs (A) Commercial $470,600.00 ($ 36.20 * 13000 Units) Home $1,161,300.00 ($ 23.70 * 49000 Units) Miniature $366,000.00 ($ 30.50 * 12000 Units) m Direct Labor Costs (B) $82,960.00 (S 13.60 * 6100 Labor Hrs) $153,680.00 ($ 13.60 * 11300 Labor Hrs) $43,930.00 ($ 19.10 * 2300 Labor Hrs) $616,100.00 $1,169,660.00 $1,141,300.00 $2,456,280.00 $ 232,300.00 $642,230.00 (D) 2 Overhead Costs (C) 3 Total Costs (A+B+C) Number of Units (E) 5 Cost per Unit (D/E) 13000 Units 49000 Units 12000 Units $89.97 $50.13 $53.52 7 Combined Cost of All Three Product Lines = $ 1169660 + $ 2456280 + $ 642230 = $ 4268170

e b.) Calculation of Activity rates for each activity cost pool :- Activity Rate = Total Overhead ( Related to cost driver ) / Cost Driver Annual Costs (A) 5 Activity Cost pool - Indirect Labor Wages Driver (B) $680,800 74000 Machine Hrs Activity Rate (A/B) 680800 / 74000 = $ 9.2 per machine hr Materials Handling $631,100 2900 Production orders 631100 / 2900 = $ 217.62 per Order Research & Development $211,400 Research & Development Time Percentage Basis Facility $466,400 88000 Sq. Ft. 466400 / 88000 = $ 5.3 per sq. ft.

UI U 7 Calculation of Overhead costs that would be assigned to each product based on activity based costing Activity Cost Pool Commercial Home Miniature Indirect Labor Wages (A) $184,000 $377,200 $119,600 (20000 Machine Hrs * $ 9.2 per Machine hr) (41000 Machine Hrs * $ 9.2 per Machine hr) (13000 Machine Hrs * $ 9.2 per Machine hr) 2 Materials Handling (B) $65,287 $457,003 (2100 Orders * $ 217.62 per Order) $108,810 (500 Orders * $ 217.62 per Order) (300 Orders * $ 217.62 per Order) 5 Research & Development (C) $29,596 $48,622 $133,182 lis 211400 * 14 %) ($ 211400 * 23 %) $ 211400 * 63 %) 3 Facility (D) $121,900 $286,200 $58,300 (23000 Sq. Ft. * $ 5.3 Sq. ft.) (54000 Sq. Ft. * $ 5.3 Sq. ft.) (11000 Sq. Ft. * $ 5.3 Sq. ft.) Total Overhead Costs (A+B+C+D) $400,783 $1,169,025 $419,892

4 Calculation of Total cost for each product using ABC system :- 6 Particulars 7 Direct Material Costs (A) Commercial $470,600.00 ($ 36.20 * 13000 Units) Home $1,161,300.00 ($ 23.70 * 49000 Units) Miniature $366,000.00 ($ 30.50 * 12000 Units) | O Direct Labor Costs (B) $82,960.00 ($ 13.60 * 6100 Labor Hrs) $153,680.00 ($ 13.60 * 11300 Labor Hrs) $43,930.00 ($ 19.10 * 2300 Labor Hrs) $400,783.00 $954,343.00 $1,169,025.00 $2,484,005.00 $419,892.00 $829,822.00 סן 3 Overhead Costs (C) 4 Total Costs (A+B+C) 5 Number of Units (E) 6 Cost per Unit (D/E) 13000 Units 49000 Units 12000 Units $73.41 $50.69 $69.15 8 Combined Cost of All Three Product Lines = $ 954343 +$ 2484005 + $ 829822 = $ 4268170