Question

A company has two products: standard and deluxe. The company expects to produce 39,166 Standard units and 44,122 Deluxe units. It uses activity-based costing and has prepared the following analysis showing budgeted cost and cost driver activity for each of its three activity cost pools. Budgeted Activity of Cost Driver Budgeted Standard Deluxe OH Cost $ 93,000 2.500 Purchases 5,250 Purchases Activity 1: Purchasing Activity 2: Designing $ 92,000 4,500 Designs 5,500 Designs Activity 3: Shipping $ 87,000 3,000 Orders 2,800 Orders Required: Make a Job Cost Sheet for the Standard Units. Use the following Direct Materials and Direct Labor information. Direct Materials $5,764 - Direct Labor $5,156 For Overhead, computer overhead rates for each of the three activities. Hint, you will divide each activity's budgeted cost by the TOTAL amount of that activity's cost driver. So you will need to add Purchases for Standard and Deluxe to get the total denominator for that activity. (Round activity rate and cost per unit answers to 2 decimal places.) Your Job Cost Sheet will include: Direct Materials + Direct Labor + Overhead for Purchasing + Overhead for Designing + Overhead for Shipping = Total Job Cost / Units Produced = Per Unit Cost The answer you type in will be the Per Unit Cost of the Standard Units. Round your answer to the nearest 2 decimal places.

Answer 1

Solution

Job cost sheet for the Standard units:

Job Cost Sheet for the Standard units: Direct Materials $5,764 Direct Labor $5,156 Overhead for Purchasing $30,000 Overhead for Designing $41,400 Overhead for Shipping $45,000 Total job cost $127,320 Units produced 39,166 Per unit Cost $3.25

Computations –

Calculation of overhead activity rates –

Activity 1 – Purchasing

Activity rate = budgeted OH cost/total purchases

Budgeted OH cost = $93,000

Total purchases = 2,500 + 5,250 = 7,750

Activity rate = $93,000/7,750 = $12 per purchase

Activity 2 – Designing

Activity rate = budgeted OH cost/total designs

Budgeted OH cost = $92,000

Total designs = 4,500 + 5,500 = 10,000

Activity rate = $92,000/10,000 = $9.20 per design

Activity 3 – Shipping

Activity rate = budgeted OH cost/total orders

Budgeted OH cost = $87,000

Total orders = 3,000 + 2,800 = 5,800

Activity rate = $87,000/5,800 = $15 per shipping order

OH cost assigned to Standard units –

OH cost assigned = activity rate x activity usage

Activity 1 – Purchases = $12 x 2,500 purchases = $30,000

Activity 2 – Designing = $9.20 x 4,500 designs = $41,400

Activity 3 – Shipping = $15 x 3,000 orders = $45,000

Which of the following statements is true –

True statements –

ABC allocates overhead based on a product’s usage of resources.

The other two statements are false for the following reasons –

ABC is always a better way to find product costs than other methods – This statement is incorrect as for small companies with limited activities traditional allocation methods also provide better method to find product cost.

There should be 3 activity pools for ABC – this statement is incorrect as ABC can be applied to any number of activity pools, ranging from 1 to many and not just limited to 3.

Disadvantage of ABC –

Cost to implement ABC

The other statements are not a disadvantage as explained,

Cost distortion can still exist, even with ABC – This statement is incorrect as ABC provides accurate cost allocation to products without any distortion.

ABC can provide more accurate overhead cost allocation – this statement is correct and a prime advantage of ABC costing. ABC helps to compute accurate overhead rate for specific activity pools by using the activity’s overhead cost and activity usage information.