Question

23 X 7 px A B C D E F G H I Current Designs has two main product lines - composite kayaks, which are handmade and very labor intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Design's controller, Dlane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company's products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits. 26 Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead. SHNAN 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 processes to finish before the next step in the production process; many of these costs are related to the space required in the building) Total Cost $189,218.75 $237,500.00 $294,531.25 $62,500.00 $43,750.00 $281,250.00 $297,500.00 $1,406,250.00 32 As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating 33 the vacuum line for the composite kayaks can be directly assigned to each of these products lines and do not need to be allocated 34 with the other costs. 36 Instructions 37 For purpose of this analysis, assume that Current Designs uses $292,500 in direct labor costs to produce 2,000 composite kayaks 38 and $357,500 in direct labor costs to produce 8,000 rotomolded kayaks each year. 39 (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 rotomolded kayak line, and the amount to be assigned to each of the units in each line. 46 (b) Another method of allocating overhead is to use direct labor dollars as an allocation basis. Remembering that the costs of the 47 oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor 48 dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product line using this method.

Answer 1

a.	Composite	Rotomolded
Directly assigned	43750	62500
Remaining amt. allocated 50% to each product line	650000	650000
Total-----------------1	693750	712500
No.of units----------2	2000	8000
Cost assigned /unit(1/2)	346.88	89.06

b.Direct labor hrs. as allocation base
Overhead Rate
Total OH costs(1406250-43750-62500) (a)		1300000
Direct labor costs(b)
Composite	292500
Rotomolded	357500	650000
OH Rate(a/b)		2
	Composite	Rotomolded
Directly assigned	43750	62500
Remaining amt. allocated based on direct labor costs	585000	715000
Total	628750	777500
No.of units	2000	8000
Cost assigned /unit	314.38	97.19

c.
Activity Cost pools	Estd. OH	Estd. Use of cost drivers		Activity-Based OH Rates
1	2	3	4	5=2/4
Design	189218.75	6+2=	8	23652.344	/model
Prototype	237500.00	12+4=	16	14843.75	/prototype
Molds	294531.25	24+2=	26	11328.125	/mold
Supervision	281250.00	24+24=	48	5859.38	/employee
Curing time	297500.00	18750+2500=	21250	14	/day

	Composite			Rotomolded
Activity cost pools	Expected use of drivers	Rates	Cost assigned	Expected use of drivers	Rates	Cost assigned
Design	6	23652.34	141914.06	2	23652.34	47304.69
Prototype	12	14843.75	178125.00	4	14843.75	59375.00
Molds	24	11328.13	271875.00	2	11328.13	22656.25
Supervision	24	5859.38	140625.00	24	5859.38	140625.00
Curing time	18750	14.00	262500.00	2500	14.00	35000.00
Total amt. allocated			995039.06			304960.94
Directly assigned			43750			62500
Total cost(a)			1038789.06			367460.94
No.of units (b)			2000			8000
Cost assigned/unit(a/b)			519.39			45.93

d.Conclusion
Summary of per unit cost assigned under the above 3 methods:
	Composite	Rotomolded
a	346.88	89.06
b	314.38	97.19
c	519.39	45.93

Current designs should assign OH costs as per ABC approach

as it assigns costs according to the usage/consumption of the resources by both type of kayaks

which sounds more accurate than the other 2 methods,

in which Rotomolded kayaks bear the cost of the composite ones.

So,not only costing , but also pricing , which is based on total costs--is bound to be inaccurate & individual profit/loss will be misleading.