Question

E18-5 Perdon Corporation manufactures safes-large mobile safes, and large walk-in sta- tionary bank safes. As part of its annual budgeting process, Perdon is analyzing the profit ability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The following information relates to overhead. Mobile Walk-In Safes Safes Units planned for production 200 50 Material moves per product line 300 200 Purchase orders per product line 450 350 Direct labor hours per product line 800 1,700 Instructions (a) The total estimated manufacturing overhead was $260,000. Under traditional costing (which assigns overhead on the basis of direct labor hours), what amount of manufac turing overhead costs are assigned to: (1) One mobile safe? (2) One walk-in safe? (b) The total estimated manufacturing overhead of $260,000 was comprised of $160,000 for materials handling costs and $100,000 for purchasing activity costs. Under activity-based costing (ABC): (1) What amount of materials handling costs are assigned to (a) One mobile safe? (b) One walk-in safe? (2) What amount of purchasing activity costs are assigned to: (a) One mobile safe? (b) One walk-in safe? (e) Compare the amount of overhead allocated to one mobile safe and to one walk-in safe under the traditional costing approach versus under ABC. (a) Traditional Costing Traditional Costing Formula: (Total Cost / Total Hours) - S rate per DLH (direct labor hour) (a1) ONE MOBILE safe overhead cost is: (Direct Labor Hours x Rate per DLH) then divided by ??? (a2) ONE WALK-IN safe overhead cost is:

Answer 1

Answer with working notes is given below

a) Traditional Overhead rate-Labor hour based Total Overheads $260,000 Total Direct labor hours $104.00 Per direct labor hour Mobile Safes Direct labor hours Direct labor hour rate Total Overhead allocated Total output al) Overhead cost per unit 800 $104.00 $83,200 A 2001B $416.00 A/B Direct labor hours Direct labor hour rate Total Overhead allocated Total output a2) Overhead cost per unit Walk-in Safes 1,700 $104.00 $176,800 A 50 B $3,536.00 A/B b) Activity Based Costing Materials Handling Cost Calculation of Activity rates Activity Activity rate Total Overheads $160,000 Total Activities 500 Material handling cost $320.00 per material move 1a) Material handling costs: Mobile Safes 300 Material moves Material move activity rate Total Overhead allocated Total output Material cost rate per unit $320.00 $96,000 A 200 B $480.00 A/B 1b) Material moves Material move activity rate Total Overhead allocated Total output Material cost rate per unit Walk-in Safes 200 $320.00 $64,000 A 50B $1,280.00 A/B Purchasing Activity Costs Calculation of Activity rates Activity Activity rate Total Overheads $100,000 Total Activities 800 Purchasing activity cost $125.00 per purchase order 2a) Purchasing Activity costs: Purchase orders Purchasing activity cost driver rate Total Overhead allocated Total output Purchasing activities cost rate per unit Mobile Safes 450 $125.00 $56,250 A 200B $281.25 A/B 2b) Material moves Material move activity rate Total Overhead allocated Total output Purchasing activities cost rate per unit) Walk-in Safes 350 $125.00 $43,750 A 50/6 $875.00 A/B c) ABC Costing Comparison : Traditional Vs Activity Based Costing Traditional UNIT Costs Costing Mobile Safe $416.00 Walk-in Safe $3,536.00 $761.25 $2,155.00 working note: Mobile Safe Material cost rate per unit Purchasing activities cost rate per unit Total Cost under ABC method $480.00 $281.25 $761.25 Walk-in Safe Material cost rate per unit Purchasing activities cost rate per unit| Total Cost under ABC method $1,280.00 $875.00 $2,155.00