Question

Problem 2. 

Fulcrum Industries manufactures dining chairs and tables. The following information is available:

	Dining Chairs		Tables		Total Cost
Machine setups	200		600		$48,000
Inspections	250		470		$72,000
Labor hours	2,600		2,400

Fulcrum is considering switching from one overhead rate based on labor hours to activity-based costing. 

Instructions 

Perform the following analyses for these two components of overhead: 

a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate. 

b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing. 

c. Comment on your findings.

Answer 1

a.

Overhead cost using single OH rate
particulars	amount(in $)	working
total cost (A)	120000	(48000+72000)
total labour hours(B)	5000	(2600+2400)
overhead rate per labour hour(A/B)	24
machine set up cost	62400	(2600*24)
Inspection cost	57600	(2400*24)
total	120000

b.

Overhead costing using Activity based costing
particulars	Dining chairs(in $)	tables(in $)	working	total(in $)
machine set up cost	12000	36000	(48000/(200+600))	48000
	(60*200)	(60*600)
Inspection cost	25000	47000	(72000/(250+470))	72000
	(100*250)	(100*470)
total	37000	83000		120000

c.

As per costing method of single OH rate , cost allocated to machine set up cost is $ 62400 & for inspection $ 57600/-.

however as per ABC , cost allocated to machine set up is $48000/- & for inspection $72000/-

Therefore from the above analysis, we conculde that as per ABC analysis cost is accurately allocated to each head , however while using single OH rate cost is not allocated appropriately.

Answer 2

Solution: a) 24 Per DLH overhead rate=Total overhead/Total DLH (48000+72000)/(2600+2400) DLH x Overhad rate overhead cost assinged Dining chairs Tables 2600 2400 24 62400 57600 b) Total cost Expected activity Activity Rates Cost assigned Dining chairs Tables Total Dining chairs Tables d=b+c le=a/d g=b*e h=c*e 48000 2 00 600 800 60 12000 36000 72000 250 470 720 100_ 25000 47000 37000 83000 Machine setup Inspection Total ABC is systmatic and more accurate method of allocating overheads. Under single overhead rate, cost are overallocated to dining chairs and under allocated to tables.

100 rate 2000 250 + 470 = $100 per inspection. Cost assigned to each produet wing ABC. Dining Tables chair machine setup 12000 36000 Inspuition. 25000 3700D 47000 83000 Direct Based costing 62400 57600 Activity based costing 37000 83000, Cost distortion 2500 25400) E Activity based costing, sbould be used as it enhanus accuracy of financias forecast f increase management understanding

If you are benefited from the solution then please , if disliked then please specify the reason.

Answer 3

Solution: a) 24 Per DLH overhead rate=Total overhead/Total DLH (48000+72000)/(2600+2400) DLH x Overhad rate overhead cost assinged Dining chairs Tables 2600 2400 24 62400 57600 b) Total cost Expected activity Activity Rates Cost assigned Dining chairs Tables Total Dining chairs Tables d=b+c le=a/d g=b*e h=c*e 48000 2 00 600 800 60 12000 36000 72000 250 470 720 100_ 25000 47000 37000 83000 Machine setup Inspection Total ABC is systmatic and more accurate method of allocating overheads. Under single overhead rate, cost are overallocated to dining chairs and under allocated to tables.