Question

Macho Bhd manufactures two models of ultra-high fidelity speakers, the X007 model and the X099 model. Below are the data regarding the models: Product X007 X099 Direct Labour Hours 1.8 DLHs per unit 0.9 DLHs per unit Annual Production 5,000 units 30,000 units Total Direct-Labor hours 9,000 DLHs 27.000 DLHs 36.000 DLHS Additional information: • • Model X007 requires RM72 in direct materials per unit, and model X099 requires RM50. The direct labour rate is RM10 per hour. The company uses direct labour hour as the base to apply manufacturing overhead cost to products. Model X007 is more complex to manufacture than model X099 and requires the use of special equipment Because of the required above, the company is considering the use of activity-based costing to apply manufacturing cost to products. . Three activity cost pools have been identified as follows: Activity cost pool Activity Measure Machine set-up Number of setups Special processing Machine-hours General factory Direct labor-hours Estimated Total Estimated Total Activity Cost | X007 X099 Total RM360,000 100 150 RM180,000 12,000 0 12,000 RM 1.260,000 9,000 27,000 36,000 RM 1.800.000

Answer 1

Requirement-d)

Requirement - a) Pre-determined OH rate -Estimated total Manufacturing OH + Est. total labor hours Estimated Overhead cost Estimated labor hours $1,800,000 36,000 = $50 per hour Requirement-b) Particulars Direct material Direct labor Overhead Total cost per unit X007 72 1 8 90 180 X099 50 9 45 1 04 Requirement - C) COMPUTATION OF PREDETERMINED OVERHEAD RATE Estimated Activity Activity Expected Predetermined Overhead Cost Pool Measure Activity Overhead rate cost Machine Number of 150 Per $360,000 $2,400 Setups part types setup Speed Machine - 12,000 $180,000 $15 per MH Processing hours Direct General per Labor 36000 $1,260,000 factory DLH Hours $35 $35 DEH Application of Predetermined overhead COMPUTATION OF OVERHEAD APPLIED Predeter Activity Activity mined MODEL X200 MODEL X99 Cost Pool Measure Overhead rate Activity Overhead Amount Activity Overhead Amount 2,400 $50 $240,000 Machine Setups Speed Processing General factory Number of setups Machine hours Direct Labor Hours $120,000 $180,000 $100 $0 15 $12,000 $0 35 $9,000 $315,000 $27,000 $945,000 Total Overhead Applied Number of Units Production Manufacturing Overhead per unit $615,000 5,000 $123.00 $1,185,000 36,000 $32.92 Particulars Direct material Direct labor Overhead Total cost per unit X007 72 18 123 213 X099 50 9 32.92 91.92

Manufacturing OH cost shifts from high-volume products to low-volume products in activity-based costing because in traditional costing methods, product-level costs are allocated among products on direct labor hour basis or volume related allocation base . Thus most of such costs are allocated to products of high volume. Where as in activity-based costing, there is a more appropriate assignment of batch-level and product-level costs .

Model X099 takes all the machine hours used in the production as a consequence manufacturing OH costs shifts from Model X007 to Model X099 . Not even a single machine hour is used for Model X007.

Special processing cost of $180,000 is distributed among both products under traditional costing method. X007 is charged with Special processing cost even when not using Machine hours, as a result OH cost per unit is higher when comparing to activity based costing.