Question

Product-Costing Accuracy, Plantwide and Departmental Rates, ABC

Escuha Company produces two type of calculators: scientific and business. Both products pass through two producing departments. The business calculator is by far the most popular. The following data have been gathered for these two products:

	Product-Related Data
	Scientific	Business
Units produced per year	74,000	740,000
Prime costs	$248,000	$2,480,000
Direct labor hours	102,200	1,022,000
Machine hours	50,000	500,000
Production runs	100	150
Inspection hours	2,000	3,000
Maintenance hours	2,250	9,000

	Department Data
	Department 1	Department 2
Direct labor hours:
Scientific calculator	75,900	26,300
Business calculator	143,080	878,920
Total	218,980	905,220
Machine hours:
Scientific calculator	24,900	25,100
Business calculator	403,380	96,620
Total	428,280	121,720
Overhead costs:
Setup costs	$231,500	$231,500
Inspection costs	170,000	170,000
Power	267,000	131,000
Maintenance	189,000	283,500
Total	$857,500	$816,000

Required:

1. Compute the overhead cost per unit for each product using a plantwide, unit-based rate using direct labor hours. Round your calculations and answers to the nearest cent.

Plantwide rate	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

2. Compute the overhead cost per unit for each product using departmental rates. In calculating departmental rates, use machine hours for Department 1 and direct labor hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per machine hour
Department 2	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

Repeat using direct labor hours for Department 1 and machine hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per direct labor hour
Department 2	$ per machine hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

3. Compute the overhead cost per unit for each product using activity-based costing. Round your calculations and answers to the nearest cent.

	Overhead Cost
Scientific	$ per unit
Business	$ per unit

Answer 1

Part (1)

Calculation of overhead cost per unit using a plantwide ,unit based rate using direct labour hours
Plantwide rate is = (Total overhead cost of Two department /Total direct labour hours)
	Department-1	Department -2	Total
Overhead cost	$ 857500	$ 816000	$ 1673500
	Scientific	Business	Total
Direct labour	102200	1022000	1124200
Plant wide rate	(1673500 /1124200)	1.49
Calculation of overhead rate per unit based on this plantwide rate $ 1.49
Particulars	Scientific	Business
Direct labour hours	102200	1022000
Total over head (Hours x 1.49 ) (A)	152136	1521364
Number of units produced (B)	74000	740000
Overhead rate per unit (A / B)	2.06	2.06

Part (2) (a)

Computation of overhead rate using departmental rates
Department -1 -(Per machine hours )
Particulars	Department-1
Overhead	857500
Particulars	Scientific	Business	Total machine hours
Machine hours	24900	403380	428280
Overhead rate	(857500 / 428280)	2.00
Department -2 -(Per direct labour hours )
Particulars	Department-2
Overhead	816000
Particulars	Scientific	Business	Total labour hours
Labour hours	26300	878920	905220
Overhead rate	(816000 / 905220)	0.90
Overhead rate for each calculator-Scientific
Overhead for scientific	(24900 x 2.00) + (26300 x 0.90)	73562.5
Total unis			74000
Overhead rate per unit	(73562.50/74000)	0.99
Overhead rate for each calculator-Business
Overhead for Business	(403380 x 2.00) + (878920 x 0.90)	1599937.5
Total unis			740000
Overhead rate per unit	(1599937.50/740000)	2.16

Rate per unit
Scientific	0.99
Business	2.16

Part (2) (b)

Computation of overhead rate using departmental rates
Department -1 -(Per direct labour hours )
Particulars	Department-1
Overhead	857500
Particulars	Scientific	Business	Total machine hours
Direct labour hours	75900	143080	218980
Overhead rate	(857500 / 218980)	3.92
Department -2 -(Per machine hours )
Particulars	Department-2
Overhead	816000
Particulars	Scientific	Business	Total labour hours
Labour hours	25100	96620	121720
Overhead rate	(816000 / 121720)	6.70
Overhead rate for each calculator-Scientific
Overhead for scientific	(75900 x 3.92) + (25100 x 6.70)	465483.7
Total unis			74000
Overhead rate per unit	(465483.7/74000)	6.29
Overhead rate for each calculator-Business
Overhead for Business	(143080 x 3.92) + (96620 x 6.70)	1208016.0
Total unis			740000
Overhead rate per unit	(1208016/740000)	1.63

Rate per unit
Scientific	6.29
Business	1.63

Part (3)

Calculation overhead rate using Activity Based Costing		Scientific	Business
Particulars	Total overhead	Cost driver	Activity	Rate per activity	No.of activity	Overhead allocated	No.of activity	Overhead allocated
Setup cost	231500	Production run	250	926	100	92600	150	138900
Inspection cost	170000	Inspection hours	5000	34	2000	68000	3000	102000
Power	267000	Machine hours	550000	0.485454545	50000	24272.72727	500000	242727.2727
Maintenance	189000	Maitenance hours	11250	16.8	2250	37800	9000	151200
Total						222672.7273		634827.2727
Number of units						74000		740000
Rate per unit						3.01		0.86
Rate per unit
Scientific	3.01
Business	0.86