Question

e-i

Clipboard IS Font Alignment Number E48 fx consumption rate A B с D E 1 Quality Upholstery Company estimated the following costs and activities for its two products, stools and pads for 2018: 2 3 Cost Activity 4 Direct Materials $ 135,000 9,000 yards at $15 per yard 5 Direct Labor $ 102,000 5100 hours @ $20 per hour 6 Machine Setup $ 60,500 320 setup hours 7 Materials Handling $ 88,200 4200 loads of material moved 8 Electric Power $ 40,000 20000 kilowatt hours 9 10 Quality Upholstery applies overhead based on direct labor hours. 11 The following information pertains to the actual production of stolls and pads: 12 13 Stools Pads 14 Units produced 5,000 20,000 15 Direct Materials 75,000 $ 61,200 16 Direct Labor $ 40,000 $ 60,000 17 Machine Setup 30,240 $ 26,460 18 Materials Handling $ 20,500 $ 61,500 19 Electric Power $ 35,000 $ 4,140 20 Actual Direct Labor Hours 2,000 3,000 21 Setup Hours 160 140 22 Loads of Materials Moved 1,000 3,000 23 Kilowatt hours consumed 17,000 2,000 24 A A A

Answer 1

e. Yes, it will pay using activity based costing. It is the more accurate method of product costing leading to more accurate pricing decisions

It increases understanding of overheads and its drivers and helps in eliminating more costly or non-value adding activities

It pays attention to details, it helps to determine accurate product costs based on the resources utilised in each product, it also gives information about cost behaviour by tracing of activities. It is a better decision making tool as it helps in determining excess capacity and cost reduction. For bigger firm with multiple products this is the best method

f.

Activity rates
Based on aloocation	Stools	Pads
Set-up hours	160	140
Cost driver rate	189.06	189.06
Activity rates	30249.6	26468.4
Loads of Material moved	1000	3000
Cost driver rate	21	21
	21000	63000
Kilowatt hours consumed	17000	2000
Cost driver rate	2	2
	34000	4000

Actual rates
Actual Machine set-up costs	30240	26460	56700
Hours	160	140	300
	189	189	189
Materials handling	20500	61500	82000
loads of materials moved	1000	3000	4000
	20.5	20.5	20.5
Power	35000	4140	39140
Kilowatt hours consumed	17000	2000	19000
	2.058824	2.07	2.06

g.

Total cost of one stool
Direct Materials	75000
Direct Labor	40000
Machine Set-up	30250	=160*189.06
Materials Handling	21000	=1000*21
Electic power	34000	=17000*2
Total cost	200250
Units	5000
Per unit cost	40.05

h.

Total cost of one pad
Direct Materials	61200
Direct Labor	60000
Machine Set-up	26468
Materials Handling	63000
Electic power	4000
Total cost	214668
Units	20000
Per unit cost	10.73

i. Using a predetermined rates as per traditional costing avoids determining costs of various activities being assigned to particular product based on its actual consumption

In the said company due to usage of a blanket rate there was no bifurcation between product withhigh consumption of overhead with high cost and that with product with high consumption of overhead with low cost. The said problem is being solved by ABC based costing and hence, it would help better costs and competitive price for the low costing product and better margins for high costing product

Here Stool had higher machine set-up hours and power consumption as compared to pads due to which its cost is actually higher than that as per blanket rate allocation which will help quote better margins and the cost of pad is lower than as determined by allocation of blanket overhead rate which will help determine competitive prices