Question

Which of the three methods do you think Current Designs should use? Why? X V fx ABCD CD4 - Excel Tutorial H As you learned in the previous chapters, Current Designs has two main product lines - composite kayaks, which are handmade and very laborIntensive and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Design's controller, Dlano Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company's products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits. Dlane has decided to use the following activities and costs to evaluate the methods of assigning overhead Activities Designing new models Creating and testing prototypes Creating molds for kayaks Operating oven for the rotomolded kayaks Operating the vacuum line for the composite kayaks Supervising production employees Curing time (the time that is needed for the chemical processes to finish before the next step in the production process: many of these costs are related to the space required in the building) Total Cost $121,000 152.000 188,500 40,000 28,000 180,000 190.500 $900,000 25 As Dlane examines the data, she decides that the cost of operating the oven for the rotomoded kayaks and the cost of operating 26 the vacuum line for the composite kayaks can be directly assigned to each of these products lines and do not need to be allocated 27 With the other costs. 26 29 Instructions 30 For purpose of this analysis, assume that Current Designs uses $234,000 in direct labor costs to produce 1,000 composite kayaks 31 and $286,000 in direct labor costs to produce 4.000 rotomolded Kayaks each year. 32 (0) Ono method of allocating overhead would allocate the common costs to each product line by using a allocation basis such as the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak. Dlone knows that about 60% of the area of the plant and 50% of the employees work on the corposite kayaks, and the remaining space 35 and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven 4 145 14: 4 49 PASTA PARA CD4 Mady

Answer 1

A)		COMPOSITE	ROTOMOLDED
	Directly assigned	28000	40000
	Remaining amount	416000	416000
	TOTAL	444000	456000
	No of units	1000	4000
	Cost assigned per unit	444	114
B)
	OVERHEAD RATE
	TOTAL OH COST(A)		160
	Direct labour cost(b)
	composite	374000
	rotomolded	457000	832000
	OH RATE (A)/(B)		5200
		COMPOSITE	ROTOMOLDED
	Directly assigned	28000	40000
	Remaining amount	374400	457600
	TOTAL	402400	497600
	No of units	1000	4000
	Cost assigned per unit	402.4	124.4
C)
	Activity cost	Estimated overhead	Estimated use of cost	Activity based OH
	DESIGN	121100	4	30275
	PROTOTYPES	152100	8	19000
	MOLDS	188500	13	14500
	SUPERVISION	180000	20	7500
	CURING TIME	190400	17000	11.2
		COMPOSITE				ROTOMOLDED
	Activity cost	ESTIMATED USE OF DRIVERS	OH RATES	COST ASSIGNED	ESTIMATED USE OF DRIVERS	OH RATES	COST ASSIGNED
	DESIGN	3	30275	90.83	1	30.275	30275
	PROTOTYPES	6	19000	114000	2	19000	38000
	MOLDS	12	14500	174000	1	14500	14500
	SUPERVISION	12	7500	90000	12	7500	90000
	CURING TIME	15000	11.2	168000	2000	11.2	22400
	TOTAL AMOUNT ALLOCATED
	Directly assigned			636825			195175
	Remaining amount			28000			40000
	TOTAL			664.83			235175
	No of units			1000			4000
	Cost assigned per unit			664.83			58.79
D)
	ABC provides a more accurate way of allocating the costs.
	Activity cost	Estimated overhead	Estimated use of cost	Activity based OH
	DESIGN	121100	8	15137.5
	PROTOTYPES	152100	4	38025
	MOLDS	188500	13	14500
	SUPERVISION	180000	24	7500
	CURING TIME	190400	17000	11.2