Question

Tutoria As you learned in the previous chapters, Curren very labor-intensive, and rotomolded which controller, Diane Buswell, is now evaluating et Designs has two main product lines- composite kayaks, which are handmade and ed kayaks, which require less labor but employ more expensive complex that its costs are greater than its bene the same time, the system that is used must not be so that itsstppropriateleral different methods of assigning overhead to these products. It is important to fits Diane has decided to use the e following activities and costs to evaluate the methods of assigning overhead activ Cost 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 $121,000 152,000 188,500 40,000 28,000 180,000 processes to finish before the next step in the production process; many of these costs are related to the space required in the building) 190,500 $900,000 Total cost of operating As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the e composite kayaks can be directly assigned to each of these products lines and do not need to be allocated with the other costs. Instructions For purpose of this analysis, assume that Current Designs uses $234,000 in direct labor costs to produce 1,000 composite kayaks and $286,000 in direct labor costs to produce 4,000 rotomolded kayaks each year. (a) One 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. Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the

Answer 1

	Activities			Overhead Cost	Rotomolded	Composite
	Designing new models			121,000
	Creating and testing prototypes			152,000
	Creating molds for kayaks			188,500
	Supervising production employees			180,000
	Curing time :(the time that is needed for the chemical			190,500
	Total			832,000
	Operating oven for the rotomolded kayaks			-	40,000
	Operating the vacuum line for the composite kayaks			-		28,000
a	OH allocation under space & Employee % method
	Details	Rotomolded	Composite
	Directly assigned	40,000	28,000
	Remaining OH Allocation 50% each	416,000	416,000
	Total OH Allocated	456,000	444,000
	No of units produced	4,000	1,000
	OH per unit of kayak	114	444
b	Details	Rotomolded	Composite	Total
	Direct Labor cost $	286,000	234,000	520,000
	% Direct labor cost	55.0%	45.0%
	OH Allocation
	Directly assigned	40,000	28,000
	Remaining OH Allocationon % of Direct labor $	457,600	374,400
	Total OH Allocated	497,600	402,400
	No of units produced	4,000	1,000
	OH per unit of kayak	124	402
	OH Costs0			Costs	Cost Drivers	Driver Amt Rotomold	Driver Amt Composite	Total Driver Amt	OH Rate per cost driver Units
c	Designing new models			121,000	No of model	1	3	4	30,250
	Creating and testing prototypes			152,000	No of proto	2	6	8	19,000
	Creating molds for kayaks			188,500	No of molds	1	12	13	14,500
	Supervising production employees			180,000	No of employees	12	12	24	7,500
	Curing time :(the time that is needed for the chemical			190,500	No of days	2,000	15,000	17,000	11
	Total			832,000
					Rotomolded		Composite
	OH Costs0			OH Rate per cost driver Units	Driver Amt Rotomold	Total OH	Driver Amt Composite	Total OH
	Designing new models			30,250	1	30,250	3	90,750
	Creating and testing prototypes			19,000	2	38,000	6	114,000
	Creating molds for kayaks			14,500	1	14,500	12	174,000
	Supervising production employees			7,500	12	90,000	12	90,000
	Curing time :(the time that is needed for the chemical			11	2,000	22,412	15,000	168,088
	Directly assigned					40,000		28,000
	Total OH Assigned					235,162		664,838
	No of units produced					4,000		1,000
	OH per unit of kayak					59		665
d	Cuurent designs should use ABC method as it precisely allocate overheads based on actual resources consumed rather than arbitrary
	basis of space & employee no or direct labor cost $ value. It correctly reflects the labor intensive cost of composite kayaks against
	the more mechanised rotomold kayaks.