Question

Single Plantwide Rate and Activity-Based Costing Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that We select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators: Three Representative Refrigerators Number of Machine Hours Number of Number of Number of Setups Sales Orders Units 100 Refrigerator-Low Volume Refrigerator-Medium Volume 500 1,600 320 54 120 180 17 Refrigerator-High Volume 1,020 5,100 Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $500 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows: Sales Order Machining Activity Setup Activity Processing Activity Activity rate $480 $750 $170 a. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). If required, round all per unit answers to the nearest cent. Round percents to one decimal place. For column C, use the minus sign to indicate a negative or decrease. Column A Column B Column C Single Rate Overhead Allocation Per Unit ABC Overhead Allocation Per Unit Percent Change in Allocation Product Volume Class Low Medium High b. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method? The machine hour rate is greater under the single rate method than under the activity-based method because 100% of the factory overhead is is allocated by machine hours under the single rate method. However, only a portion of the factory overhead is allocated under the machine rate method using activity-based costing. The remaining factory overhead is allocated using the . Thus, the numerator for for determining the machine hour rate under activity-based costing must be less than the numerator under the single machine hour rate method.

Answer 1

Solution:

Solution a)

Calculation of Overheads allocated to the three refrigerators based on single machine hour rate.

	Refrigerator - Low Volume	Refrigerator - Medium Volume	Refrigerator - High Volume
Number of machine Hours	100	320	1,020
Machine Hour Rate per hour $	500.00	500.00	500.00
Total Overheads Cost $ = Number of machine Hours x Machine Hour Rate per hour $	50,000.00	1,60,000.00	5,10,000.00
Number of Units	500	1,600	5,100
Overhead cost per unit $	100.00	100.00	100.00

Calculation of Overheads allocated to the three refrigerators based on Activity Based Costing

	Refrigerator - Low Volume			Refrigerator - Medium Volume			Refrigerator - High Volume
Costs	Cost Driver	Activity Rate $	Cost Assigned $	Cost Driver	Activity Rate $	Cost Assigned $	Cost Driver	Activity Rate $	Cost Assigned $
Machining Activity	100	480.00	48,000.00	320	480.00	1,53,600.00	1,020	480.00	4,89,600.00
Setup Activity	18	750.00	13,500.00	17	750.00	12,750.00	12	750.00	9,000.00
Sales Order Processing Activity	54	170.00	9,180.00	120	170.00	20,400.00	180	170.00	30,600.00
Total Overhead Cost $	70,680.00			1,86,750.00			5,29,200.00
Number of Units	500			1,600			5,100
Overhead Cost per Unit $	141.36			116.72			103.76

	Column A	Column B	Column C
Product Volume Class	Single Rate Overhead Allocation per unit	ABC Overhead Allocation per unit	Present Change in allocation
Low	$100.00	$141.36	41.36%
Medium	$100.00	$116.72	16.72%
High	$100.00	$103.76	3.76%