Question

Meanwhile its custom-made its custom declining volumes but com i ng forced it to lower prices on level close to its cost of production high demand and customers le commented on its favor ment is considering dropping its line of retail the company to lower prices on its high- wer) prices compared to t o p Management is Products and devoting all of its res t ostom-made furniture Required 1 What reasons could explain why it for the company volume retail products 2. Why do you believe the company charges less for cu Does a company's costing method have any effect on its pricing deciso 4. Aside from the differences in volume of output, what pro between making custom-onder furniture and misstarket furnishings 5. What information might the company obtain from using based costing methods? Craft Pro Machining produces machine tools for the construction i overhead costs were taken from its company records. any charges less for custom order products than its competitors ces in volume of outpu Pricing decisions? Explain. t on differences do you believe exist the company obtain from usine ARChat it might not obtain using volume- -3A aty-based ning produces machine tools for the industry. The following details abou P1 P3 Production Activity Indirect Labor indirect Materials Other Overhead $120.000 Grinding Polishing Product modification Providing power System calibration $135.000 600,000 $255.000 500.000 Additional information on the drivers for its production activities follows. Grinding..... Polishing ... Product modification ........... Providing power..... System calibration ..... 13.000 machine hours 13.000 machine hours 1.500 engineering hours 17.000 direct labor hours 400 batches Required 1. Classify each activity as unit level, batch level, product level, or facility level. 2. Compute the activity overhead rates using ABC. Combine the grinding and polishing activities into single cost pool 3. Determine overhead costs to assign to the following jobs using ABC Job 3175 Job 4286 Number of units ....... Machine hours.. Engineering hours... Batches Direct labor hours 200 units 550 MH 26 eng. hours 30 batches 500 DLH 2,500 units 5.500 MH 32 eng hours 90 batches 4.375 DLH 4. What is the overhead cost per unit for Job 31757 What is the overhead cost per unit for Job 4869 5. If the company uses a plantwide overhead rate based on direct labor hours, what is the o b De overhead cost for each unit of Job 3175? Of Job 4286? 6. Compare the overhead costs per unit computed in requirements 4 and 5 for each ich wh more accurately assigns overhead costs? d in requirements 4 and 5 for each job. Which method

Answer 1

1. Classification of Overheads:

Grinding	Unit level
Polishing	Unit level
Product Modification	Product level
Power	Unit level
System caliberation	Batch Level

2.

Activity	Amount	Cost driver	Cost driver	Acivity rate per cost driver
Grinding and Polishing	455000	Machine hrs	13000	35.00
Product Modification	600000	Engineering hrs	1500	400.00
Power	255000	DLH	17000	15.00
System caliberation	500000	Batches	400	1250.00
TOTAL	1810000

3,4.

Activity	Cost driver	Job 3175		Job 4286
Grinding and Polishing	Machine hrs	550*35	19250	5500*35	192500
Product Modification	Engineering hrs	26*400	10400	32*400	12800
Power	DLH	500*15	7500	1375*15	65625
System caliberation	Batches	30*1250	37500	90*1250	112500
TOTAL (A)			74650		383425
No of units (B)	Given		200		2500
Overhead Cost per Unit (A/B)			373.25		153.37

5. Overhead rates based on DLH:

Total Overheads (from 2)	1810000
Total DLH (given)	17000
So, Overhead rate per DLH	181000/17000 = 106.47

	Job 3175	Job 4286
DLH (given) (A)	500	4375
Overhead rate per DLH (B)	106.47	106.47
So, Overhead Cost of jobs (C =A*B)	53235.29	465808.82
Total Units (D)	200	2500
Overhead Cost per Unit (C/D)	266.18	186.32

6.

	Job 3175	Job 4286
As per ABC	373.25	153.37
As per Aborption	266.18	186.32

Thus, ABC assigns overhead costs more accurately.