Multiple Versus Single Overhead Rates, Activity Drivers
Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year:
Activity | Expected Cost | Activity Driver | Activity Capacity |
Setting up equipment | $464,580 | Number of setups | 580 |
Ordering costs | 327,600 | Number of orders | 18,200 |
Machine costs | 836,000 | Machine hours | 41,800 |
Receiving | 364,900 | Receiving hours | 8,900 |
Deoro produces two models of dishwashers with the following expected prime costs and activity demands:
Model A | Model B | |
Direct materials | $571,000 | $844,000 |
Direct labor | $484,000 | $459,000 |
Units completed | 15,400 | 8,300 |
Direct labor hours | 5,700 | 1,500 |
Number of setups | 400 | 180 |
Number of orders | 5,900 | 12,300 |
Machine hours | 23,800 | 18,000 |
Receiving hours | 2,400 | 6,500 |
The company's normal activity is 7,200 direct labor hours.
Required:
1. Determine the unit cost for each model using direct labor hours to apply overhead. Round intermediate calculations and final answers to nearest cent.
Unit Cost | |
Model A | $ |
Model B | $ |
2. Determine the unit cost for each model using the four activity drivers. Round your answers to nearest cent.
Unit Cost | |
Model A | $ |
Model B | $ |
3. Which method produces the more accurate cost
assignment?
Direct Labor hours or Four activity drivers
Requirement 1
Cost per Unit | |
Model A | $ 170.97 |
Model B | $ 207.02 |
Requirement 2
Model A | $ 133.51 |
Model B | $ 276.52 |
Requirement 3
Four activity driver method is more accurate.
Working
Traditional costing | ||
4.5 | 4.5 | |
Direct material | $ 571,000.00 | $ 844,000.00 |
Direct labor | $ 484,000.00 | $ 459,000.00 |
Overheads | $ 1,577,874.00 | $ 415,230.00 |
Total Cost per unit | $ 2,632,874.00 | $ 1,718,230.00 |
Total Units | 15400 | $ 8,300.00 |
Unit cost | $ 170.97 | $ 207.02 |
Plantwide overhead rate (464580+327600+836000+364900)/7200) | $ 276.82 |
Overhead allocated to Model A (5700 x 276.82) | $ 1,577,874 |
Overhead allocated to Model B (1500 x 276.82) | $ 415,230 |
Calculation of Activity rates | |||||
Activity Cost Pool | Activity driver | Overhead Cost (A) | Expected Activity (B) | Activity rate (A/B) | |
Setting up equipment | Number of setup | $ 464,580.00 | 580 | $ 801.00 | Per setup |
Ordering cost | Number of order | $ 327,600.00 | 18200 | $ 18.00 | Per order |
Machine Costs | Number of machine hour | $ 836,000.00 | 41800 | $ 20.00 | Per machine hour |
Receiving | Number of Receiving hour | $ 364,900.00 | 8900 | $ 41.00 | Per Receiving hour |
Cost assigned to Model A | |||
Activity name | Activity Rates | Activity | ABC Cost |
(A) | (B) | (A x B) | |
Setting up equipment | $ 801.00 | 400.00 | $ 320,400.00 |
Ordering cost | $ 18.00 | 5900 | $ 106,200.00 |
Machine Costs | $ 20.00 | 23800 | $ 476,000.00 |
Receiving | $ 41.00 | 2400 | $ 98,400.00 |
Total Overheads assigned | $ 1,001,000.00 |
Cost assigned to Model B | |||
Activity name | Activity Rates | Activity | ABC Cost |
(A) | (B) | (A x B) | |
Setting up equipment | $ 801.00 | 180 | $ 144,180.00 |
Ordering cost | $ 18.00 | 12300 | $ 221,400.00 |
Machine Costs | $ 20.00 | 18000 | $ 360,000.00 |
Receiving | $ 41.00 | 6500 | $ 266,500.00 |
Total Overheads assigned | $ 992,080.00 |
ABC Costing | ||
Model A | Model B | |
Direct material | $ 571,000.00 | $ 844,000.00 |
Direct labor | $ 484,000.00 | $ 459,000.00 |
Overheads | $ 1,001,000.00 | $ 992,080.00 |
Total Cost per unit | $ 2,056,000.00 | $ 2,295,080.00 |
Total Units | 15400 | $ 8,300.00 |
Unit cost | $ 133.51 | $ 276.52 |
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