Question

A company produces three products: Institutional, Standard, and Silver. The company used a Traditional Costing System with a predetermined overhead rate of $9 per unit produced based on an estimated $945,000 total overhead and estimated 105,000 units to be produced between all three products.   The company uses six overhead activities for which budgeted information is provided below:

The company uses six overhead activities for which budgeted information is provided below: Activity Processing Set Up Handling Machine Depreciation Quality Control Packing Cost Driver Number of Orders Number of production runs Pounds of materials used Machine hours Number of inspections Number of units Estimated Cost $45,000 180,000 300,000 240,000 60,000 120,000 The company also collected expected production information for each product. Actual labor costs was $15 per labor hour. Institutional Standard Silver Units Produced 70,000 27,000 8,000 Direct Materials Cost $39,000 $24,000 $15,000 Direct Labor Hour 450 450 600 Orders 12 Production Runs Pounds of Materials 15,000 6,000 3,000 Machine Hours 580 140 80 Inspections Units Shipped 70,000 27,000 8,000 9 6

Answer 1

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A Company
Workings for Answer 1	Institutional	Standard	Silver	Note
Units produced	70,000.00	27,000.00	8,000.00	A
OH rate	9.00	9.00	9.00	B
OH allocated	630,000.00	243,000.00	72,000.00	C=A*B
Direct Labor hour	450.00	450.00	600.00	D
Rate per hour	15.00	15.00	15.00	E
Direct Labor cost	6,750.00	6,750.00	9,000.00	F=D*E
Answer 1	Institutional	Standard	Silver
DM	39,000.00	24,000.00	15,000.00
DL	6,750.00	6,750.00	9,000.00	See F
OH	630,000.00	243,000.00	72,000.00	See C
Total cost	675,750.00	273,750.00	96,000.00	G
Cost per unit	9.65	10.14	12.00	H=G/A

Workings for Answer 2
		I	J	K	L	M=J+K+L	N=I/M
Calculation of ABC rates for overhead	Cost Driver	Cost	Activity used
Activity cost pool			Institutional	Standard	Silver	Total	ABC rates
Processing	Number of orders	45,000.00	12.00	9.00	6.00	27.00	1,666.67
Set up	Number of production runs	180,000.00	3.00	3.00	3.00	9.00	20,000.00
Handling	Pounds of materials used	300,000.00	15,000.00	6,000.00	3,000.00	24,000.00	12.50
Machine depreciation	Machine hours	240,000.00	580.00	140.00	80.00	800.00	300.00
Quality Control	Number of inspections	60,000.00	3.00	3.00	3.00	9.00	6,666.67
Packing	Number of units	120,000.00	70,000.00	27,000.00	8,000.00	105,000.00	1.14
Total Cost assigned		945,000.00

		See N	See J	O=N*J	See K	P=N*K	See L	Q=N*L
Allocation table			Institutional	Standard	Silver
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned	Activity used	Cost assigned
Processing	Number of orders	1,666.67	12.00	20,000.00	9.00	15,000.00	6.00	10,000.00
Set up	Number of production runs	20,000.00	3.00	60,000.00	3.00	60,000.00	3.00	60,000.00
Handling	Pounds of materials used	12.50	15,000.00	187,500.00	6,000.00	75,000.00	3,000.00	37,500.00
Machine depreciation	Machine hours	300.00	580.00	174,000.00	140.00	42,000.00	80.00	24,000.00
Quality Control	Number of inspections	6,666.67	3.00	20,000.00	3.00	20,000.00	3.00	20,000.00
Packing	Number of units	1.14	70,000.00	80,000.00	27,000.00	30,857.14	8,000.00	9,142.86
Total Cost assigned				541,500.00		242,857.14		160,642.86

Answer 2	Institutional	Standard	Silver	Note
DM	39,000.00	24,000.00	15,000.00
DL	6,750.00	6,750.00	9,000.00	See F
OH	541,500.00	242,857.14	160,642.86	See Workings above
Total cost	587,250.00	273,607.14	184,642.86	R
Cost per unit	8.39	10.13	23.08	S=R/A

Answer 3	Institutional	Standard	Silver
Plant wide	9.65	10.14	12.00
ABC	8.39	10.13	23.08
Difference	1.26	0.01	(11.08)
Remarks	Over costed	Over costed	Under costed