Question

Buoys and Gulls Corp manufactures three types of model boat. It is estimated that the following activity will take place during 2014:

Product	Direct material cost per unit ($)	Direct labor cost per unit ($)	Total output of each product (in units)	Machine hours worked (per unit)	Total machine hours worked
A	100	80	1,000	1	?
B	60	70	2,000	2	?
C	60	40	5,000	7	?

Fixed manufacturing overheads for the period are estimated at $1,400,000. Overheads are currently allocated to products using the total number of machine hours worked during the year. The company is about to implement an activity-based costing (ABC) system and an analysis of overhead has identified the following cost pools, cost drivers and product support activities:

Overhead cost pools	$	Activity-based cost drivers
Purchasing	400,000	Number of orders placed
Machine set ups	300,000	Number of machine set ups
Quality control	500,000	Inspection hours
Power	200,000	Machine hours worked
Total overhead	1,400,000

Product	Number of orders placed	Number of machine set-ups	Inspection hours
A	3,000	12	350
B	8,000	18	180
C	9,000	20	470

Required:

1. Calculate a predetermined overhead allocation rate assuming that fixed manufacturing overheads are allocated using the total number of machine hours worked in the factory during 2014.

PROBLEM 1 CONTINUES ON NEXT PAGE

2. Calculate the total cost per unit for each product using the overhead allocation rate calculated in part a)

3. Calculate the total cost per unit for each product using ABC. Clearly show all intermediate workings.

Answer 1

Solution a : Calculation a predetermined overhead allocation rate assuming that fixed manufacturing

overheads are allocated using the total number of machine hour

predetermined overhead allocation rate = Total Fixed Manufacturing Overhead / Total No. of Machine Hours

predetermined overhead allocation rate = 1400000 / 40000

predetermined overhead allocation rate = $35 per Machine hour

Working Note = Calculation of Total Machine Hours

Product	Number of units	machine hrs req. per unit	no. of machine hours
A	1000	1	1000
B	2000	2	4000
C	5000	7	35000
Total machine hours			40000

Calculation of total cost per unit for each product using the overhead allocation rate calculated in part a)

Particulars	Product A	Product B	Product C
Direct Material Cost	100000 (100 x 1000units)	120000 (60 x 2000units)	300000 (60 x 5000 units)
Direct Labour Cost	80000 (80 x 1000units)	140000 (70 x 2000units)	200000 (40 x 5000units)
Fixed Manufacturing Overhead	35000 (35 x 1000Machine hrs)	140000 (35 x 4000Machine hrs)	1225000 (35 x 35000Machine hrs)
Total Cost (A)	215000	400000	1725000
Total units (B)	1000	2000	5000
Cost Per Unit (A/B)	215	200	345

Calculation of total cost per unit for each product using ABC

Particulars	Product A	Product B	Product C
Direct Material Cost	100000 (100 x 1000units)	120000 (60 x 2000units)	300000 (60 x 5000 units)
Direct Labour Cost	80000 (80 x 1000units)	140000 (70 x 2000units)	200000 (40 x 5000units)
Purchasing overhead	60000 [400000 x (3000 orders / 20000orders)]	160000 [400000 x (8000 orders / 20000orders)]	180000 [400000 x (9000 orders / 20000orders)]
Machine set ups overhead	72000 [300000 x (12 setups / 50 Setups)]	108000 [300000 x (18 setups / 50 Setups)]	120000 [300000 x (20setups / 50 Setups)]
Quality control overhead	175000 [500000 x(350 inspection hrs / 1000 inspection hrs)]	90000 [500000 x(180 inspection hrs / 1000 inspection hrs)]	235000 [500000 x(470 inspection hrs / 1000 inspection hrs)]
Power overhead	5000 [200000 x (1000 machine hrs / 40000 machine hrs)	20000 [200000 x (4000 machine hrs / 40000 machine hrs)	175000 [200000 x (35000 machine hrs / 40000 machine hrs)
Total Cost (A)	492000	638000	1210000
Total units (B)	1000	2000	5000
Cost Per Unit (A/B)	492	319	242