Question

Problem 1: Dandy Desks Company manufactures two products: a standing desk and a portable desk. The portable desks are more complex of the two products, and they require more direct labor time and more machine time per unit than the standing desk. Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity-based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers, along with other product information are as follows: Activity Pool Setup Materials purchasing Machining/fabricating Total over head costs Overhead Costs $768,000 $330,000 $408,000 $1,506,000 Total Driver Usage 9,600 setups 8,250 purchase orders 81,600 machine hours Number of Units Produced Direct materials cost Direct labor cost Direct labor hours Setups Purchase orders Machine hours Standing Desks 120,000 $ 45.00 per unit $ 15.75 per unit 90,000 1,200 6,210 24,000 Portable Desks 30,000 90.00 per unit 42.00 per unit 60,000 8,400 2,040 57,600 Required: a) Using the traditional method of allocating overhead based on direct labor hours, compute the unit cost of standing desks and portable desks. b) Using an activity-based costing approach, compute the unit product cost for the standing desks and the portable desks. c) Why would your answer to aliv) and (iv) differ? Be specific.

Answer 1

Answer with working notes is given below

Traditional Overhead rate Total Overheads Total Direct labor hours $1,506,000 150,000 $10.04 Per direct labor hour Direct labor hours Direct labor hour rate Total Overheads allocated Total Output Overhead cost per unit Standing Desk Portable Desk 90,000 60,000 $10.04 $10.04 $903,600 $602,400 A 120,000 30,000 B $7.53 $20.08 A/B Total manufacturing cost per unit- Traditional Costing Standing Desk Portable Desk Direct Material $45.00 $90.00 Direct Labor $15.75 $42.00 Total Overhead allocated $7.53 $20.08 Total manufacturing cost per unit $68.28 $152.08 Calculation of Activity rates Activity Activity rate Set up Material purchasing Machining /Fabricating Total budgeted indirect costs Total Overheads $768,000 $330,000 $408,000 $1,506,000 Total Activities 9,600 8,250 81,600 $80.00 Per set up $40.00 per purchase order $5.00 per machine order Allocation of Overheads - ABC method Cost activity rate Activities used Allocated Cost Activity 8,400 Set up $80.00 Material purchasing $40.00 Machining /Fabricating $5.00 Total Overheads Total Volume Overhead cost per unit Standing Desk Portable Desk Standing Desk | Portable Desk 1,200 $96,000 $672,000 6,210 2,040 $248,400 $81,600 24,000 57,600 $120,000 $288,000 $464,400 $1,041,600 120,000 30,000 B $3.87 $34.72 A/B Total manufacturing cost per unit- ABC method Standing Desk Portable Desk Direct Material $45.00 $90.00 Direct Labor $15.75 $42.00 Total Overhead allocated $3.87 $34.72 As per above working Total manufacturing cost per unit $64.62 $166.72 Comparison of Product Cost Traditional Costing ABC Costing Comments Standing Desk Portable Desk $68.28 $152.08 $64.62 $166.72 Over-Costing Under-Costing Comments: Overhead allocation as per traditional method is based on direct labor hours Since Standard desk is using more labor hours more overheads is allocated to it under traditional method But in ABC method of costing allocation of overheads is based on actual consumption of activities rather than single rate Hence Portable desk is consuming more activities and hence more overhead allocated to it Portable desk consumes more set ups and machine hours compared to Standing Desk