Question

Problem 7-21 – Comparing traditional and ABC costs
	Name:
	Course:
	Date:
	Ellis Perry is an electronics components manufacturer.  Information about the company’s two products follows:
					AM-2		FM-9
	Units produced				15,000		2,000
	Direct labor hours required for production				15,000		14,000
	Units per batch				3,000		50
	Shipping weight per unit				0.5 lbs.		4 lbs.
	The company incurs $899,000 in overhead per year and has traditionally applied overhead on the basis of direct labor hours.
Required
a.	How much overhead will be allocated to each product using the traditional direct labor hours allocation base?  What overhead cost per unit will be allocated to each product?
		Here's one way you could solve this problem:
	Overhead Rate	=	Estimated Overhead	=	[Figure]			=	[Formula]
			Estimated Cost Driver		[Figure]
					AM-2		FM-9
			Total overhead to product		[Formula]		[Formula]
		÷	Number of units produced		[Figure]		[Figure]
		=	Overhead per unit		[Formula]		[Formula]
	Or solve your own way:
b.	Assume that Ellis Perry has identified three activity cost pools.
	Pool		Cost		Cost Driver
	Assembly		$638,000		Direct labor hours
	Setup		121,500		Number of setups (1 per batch)
	Packaging		139,500		Weight
	Given these activity pools and cost drivers, how much overhead should be allocated to each product?  What overhead cost per unit will be allocated to each product?
	Solve:
c.	Explain the change in overhead costs per unit.
	Answer:

Answer 1

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Ellis Perry is an electronics components manufacturer.  Information about the company’s two products follows:
			AM-2	FM-9
	Units produced		15,000	2,000
	Direct labor hours required for production		15,000	14,000
	Units per batch		3,000	50
	Shipping weight per unit		0.5 lbs.	4 lbs.
Part a
	Overhead Rate	Estimated Overhead	$                                                                                                                                                 899,000			$ 31.00
		Estimated Cost Driver	29,000
			AM-2	FM-9
	Total overhead to product		$                                                       465,000	$                           434,000
	Number of units produced		15,000	2,000
	Overhead per unit		$                                                            31.00	$                             217.00
Part b
	Pool	Cost	Cost Driver	Total Activities	Per activity Cost
	Assembly	$                                               638,000	Direct labor hours	29,000	$                         22.00
	Setup	$                                               121,500	Number of setups (1 per batch)	45	$                   2,700.00
	Packaging	$                                               139,500	Weight	15,500	$                           9.00
	Direct labor hours	14,000+15,000	29,000
	Number of setups (1 per batch)	(15,000/3,000)+(2,000/50)	45
	Weight	(15,000*0.5)+(2,000*4)	15,500
	AM-2
	Assembly	15,000 DLH × $22/DLH	$                                                       330,000
	Setup	5 setups × $2,700/setup	$                                                         13,500
	Packaging:	7,500 pounds × $9/pound	$                                                         67,500
	Total overhead		$                                                       411,000
	Number of units produced		15,000.00
	Overhead per unit		$                                                            27.40
	FM-9
	Assembly	14,000 DLH × $22/DLH	$                                                       308,000
	Setup	40 setups × $2,700/setup	$                                                       108,000
	Packaging:	8,000 pounds × $9/pound	$                                                         72,000
	Total overhead		$                                                       488,000
	Number of units produced		2,000.00
	Overhead per unit		$                                                         244.00