Question

Perdon Corporation manufactures safes-large mobile safes, and large walk in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead. Mobile Safes Walk-in 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

Answer 1

	Traditional costing:
	Overhead rate=Total estimated manufacturing overhead/Total direct labor hours=264000/(800+1700)=264000/2500=$ 105.60
(1).	Allocated to mobile safe in total=Overhead rate*Direct labor hours=105.60*800=$ 84480
	Allocated to one mobile safe=Overhead allocated/Units planned for production=84480/200=$ 422.40
(2).	Allocated to walk-in safe in total=Overhead rate*Direct labor hours=105.60*1700=$ 179520
	Allocated to one walk-in safe=Overhead allocated/Units planned for production=179520/50=$ 3590.40
	ABC:
	Material handling costs:
	Overhead rate=Total estimated manufacturing overhead for material handing/Total material moves=176000/(300+200)=176000/500=$ 352
(a)	Allocated to mobile safe in total=Overhead rate*Material moves=352*300=$ 105600
	Allocated to one mobile safe=Overhead allocated/Units planned for production=105600/200=$ 528
(b)	Allocated to walk-in safe in total=Overhead rate*Material moves=352*200=$ 70400
	Allocated to one walk-in safe=Overhead allocated/Units planned for production=70400/50=$ 1408
	Purchasing activity costs:
	Overhead rate=Total estimated manufacturing overhead for purchasing activity/Total purchase orders=88000/(450+350)=88000/800=$ 110
(a)	Allocated to mobile safe in total=Overhead rate*Purchase orders=110*450=$ 49500
	Allocated to one mobile safe=Overhead allocated/Units planned for production=49500/200=$ 247.50
(b)	Allocated to walk-in safe in total=Overhead rate*purchase orders=110*350=$ 38500
	Allocated to one walk-in safe=Overhead allocated/Units planned for production=38500/50=$ 770
	Comparison:
				Traditional costing	Activity-based costing
	Mobile safe			84480	155100
					(105600+49500)
	Walk-in safe			179520	108900
					(70400+38500)