Question

. . Canister manufactures containers for two types of lawn sprayers: PAGE 1. Home Sprayer 2. Commercial Sprayer The home model is a high volume (40,000 units), half gallon cylinder that holds 2 pounds of chemical The commercial model is a low volume (10,000 units), two-gallon cylinder that holds 10 pounds of chemical. Both products require 2.0 hours of direct labor for completion. Therefore, total annual direct labor hours 100,000 (2.0 hrs. * (40,000 + 10,000)]. Expected annual manufacturing overhead is $1,400,000. Plant-wide overhead is allocated based on direct labor hours. The direct materials cost per unit is $15.00 for the home model and $25.00 for the commercial model. Direct Labor cost is $20 per unit for both home and commercial models. The company manages three activity cost pools and related cost drivers and accumulated overhead by cost pools as follows: Expected use Expected Use Activity Cost Cos Estimated Expected use of for for Pools Drivers Overhead Cost Drivers Home Commercial Forming Machine 200,000 40,000 30,000 10,000 Hours Assembling Number of 400,000 200,000 150,000 50,000 Parts Packing and Pounds 800,000 320,000 200,000 120,000 shipping Total $1,400,000 Instructions: 1. (2pts) Calculate the plant-wide overhead rate for Canister Company. 2. (4pts) Using a plant-wide overhead rate compute the total cost Per Unit of each product. 3. (6pts) Under ABC costing prepare a schedule showing the computations of the activity based overhead rates (per cost driver). 4. (8pts) Prepare a schedule assigning each activity's overhead cost pool to each product based on use of the cost drivers. (Include the computation of overhead cost per unit rounding to the nearest cent) 5. (6pts) Compute the total cost per unit (DM, DL, Ohd.) for each product under ABC costing. 6. (4pts) Determine if traditional costing for Home and Commercial units are Overcosted or Undercosted compared to ABC and by how much.

Answer 1

1. Plant-wide overhead rate = Total Budgeted Overhead / Total Direct Labor Hours = $ 1,400,000 / 100,000 = $ 14 per direct labor hour.

2.

	Home	Commercial
Direct materials	$ 15.00	$ 25.00
Direct labor	20.00	20.00
Overhead	28.00	28.00
Total cost per unit	$ 63	$ 73

3.

Activity Cost Pool	Estimated Overhead	Expected Use of Cost Drivers	Activity Rate
Forming	$ 200,000	40,000 machine hours	$ 5 per machine hour
Assembling	400,000	200,000 parts	$ 2 per part
Packing and Shipping	800,000	320,000 pounds	$ 2.50 per pound
	$ 1,400,000

4.

Activity Cost Pools	Activity Rate	Home	Commercial
		Expected Use of Cost Driver	Overhead Cost	Expected Use of Cost Driver	Overhead Cost
Forming	$ 5 per MH	30,000 MH	$150,000	10,000 MH	$50,000
Assembling	$ 2 per part	150,000 parts	300,000	50,000 parts	100,000
Packing and Shipping	$ 2.50 per pound	200,000 pounds	500,000	120,000 pounds	300,000
Total overhead cost assigned			$950,000		$ 450,000
Units produced			40,000		10,000
Overhead cost per unit			$ 23.75		$ 45.00

5.

	Home	Commercial
Direct Materials	$ 15.00	$ 25.00
Direct Labor	20.00	20.00
Overhead	23.75	45.00
Cost per unit	$ 58.75	$ 90.00

6.

	Home	Commercial
Cost per unit under traditional costing	$63.00	$73.00
Cost per unit under ABC	58.75	90.00
Overcosted/ Undercosted	Overcosted by $ 4.25	Undercosted by $ 17