Question

Quality Furniture,Inc., produces a wood desk that sells for $500 and a wood table that sells for $900. Last year, total overhead costs of $6,000,000 were allocated based on direct labor costs. Direct labor costs totaled $2,000,000 last year, and Quality Furniture produced 15,000 desks and 5,000 tables. Total direct labor and direct materials costs by product for the last year were as follows:

			Desk		Table		Total
	Direct materials		1,575,000		950,000
	Direct labor		1,200,000		800,000		2,000,000
	Sales price		500		900
	Total OH						6,000,000
	Units produced		15,000		5,000
The management of Quality Furniture would like to use activity-based costing to allocate overhead rather than one plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.

Estimated Cost Driver Activity Estimated Activity Cost Driver Overhead Costs Desk Table Total umber of purchase or umber of setups $ 800,000 1,600,000 2,400,000 1,200,000 $6,000,000 1,000 500 42,000 18,000 60,000 15,000 5,000 20,000 100 260 Purchase orders Machine setups Machine maintenance Quality inspections 900 240 chine hours umber of inspections Total

Required:
1. Calculate the direct materials cost per unit and direct labor cost per unit for each product.
2.	a. Using the plantwide allocation method, calculate the predetermined overhead rate and determine the overhead cost per unit allocated to the desk and table products.
	b. Using the plantwide allocation method, calculate the product cost per unit for the desk and table products. Round results to the nearest cent.
3.	a. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. (Hint: Step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.)
	b. Using the activity-based costing allocation method, allocate overhead to each product. (Hint: This is step 5 in the activity-based costing process.) Determine the overhead cost per unit. Round results to the nearest cent.
	c. What is the product cost per unit for the desk and table products?
4. Calculate the per unit profit for each product using the plantwide approach and the activity-based costing approach. How much did the per unit profit change when moving from one approach to the other?

Answer 1

Desk Table $ 1,575,000 $ Direct materials Units produced direct materials cost per unit 950,000 5,000 190 15,000 105 $ 6 redetermined overhead rate total overhead costs/total direct labor costs redetermined overhead rate $6,000,000 $2,000,000 redetermined overhead rate 3.00 er $of direct labor cost 10 overhead cost per unit allocated to the desk overhead cost per unit allocated to the table 240.00 480.00 13 14 15 16 17 18 2 (b Desk Table 105 $ Direct materials Direct labor Allocated overhead product cost per unit 190 160 480 830 240 $ 425 $ estimated cost driver activit estimated overhead costs $800,000 $ 1,600,000 $ 2,400,000 $ 1,200,000 desk 900 240 42000 predetermined overhead rate 421.05 3,200.00 40.00 60.00 activity table total 21 1000 1900$ 260 urchase orders machine setups machine maintenance quality inspection:s 500 1800060000 $ 20000S 5000 26

B37 X f3 (c) 26 27 3 (b allocation to desk activity allocation to table 28 378,947.37 421,052.63 832,000.00 $1,680,000.00$ 720,000.00 S 900,000.00$ 300,000.00 3,726,947.37 2,273,052.63 5,000 454.61 29 urchase orders machine setu machine maintenance $ 768,000.00 31 32 uality inspections total allocated overheads units produced overhead cost per unit 34 35 15,000 $248.46 $ Desk Table 37 38 39 40 41 Direct materials Direct labor Allocated overhead 105.00 $ 80.00 $ $248.46 $ $433.46 $ 190.00 160.00 454.61 804.61 roduct cost per unit 43 4 Desk Table profit per unit (using plantwide) profit per unit (using activity based) $ increase (decrease) in profit per unit $ 75.00 $ 66.54 $ 8.46) S 70.00 95.39 25.39 45 47 48

for formulas and calculations, refer to the next images -

Desk Table Direct materials Units produced direct materials cost per unit 1575000 950000 5000 D3/D4 E3/E4 6 redetermined overhead rate total overhead costs/total direct labor costs redetermined overhead rate = $6,000,000 / $2,000,000 redetermined overhead rate- 6000000/2000000 er $of direct labor cost 10 overhead cost per unit allocated to the desk overhead cost per unit allocated to the table 1200000/15000*E9 -800000/5000" Е9 2 (b) Desk Table 14 15 16 17 18 Direct materials Direct labor Allocated overhead product cost per unit D5 1200000/15000 E11 E5 -800000/5000 E12 SUM(E15:E17 -SUM(D15:D17) estimated cost driver activi predetermined overhead rate activity estimated overhead costs desk tabletotal 21 urchase orders machine setups machine maintenance quality inspection:s 900 240 42000 1000 E22+F22D22/G22 260 E23+F23 D23/G23 18000 E24+F24D24/G24 5000 E25+F25D25/G25 1600000 2400000

B37 26 27 3 (b activity allocation to desk allocation to table 28 H22*E22 H23 E23 H24 E24 H25 E25 H22 F22 H23*F23 H24*F24 H25 F25 29 urchase orders machine setups machine maintenance quality inspection:s total allocated overheads units produced overhead cost per unit 32 -SUM (D29:D32) -SUM(E29:E32) 5000 35 D33/D34 E33/E34 37 Desk Table Direct materials Direct labor Allocated overhead 105 190 160 39 40 80 D35 E35 roduct cost per unit -SUM (D38:D40) -SUM(E38:E40) 42 43 4 Desk Table profit per unit (using plantwide) profit per unit (using activity based) 500-D41 increase (decreasel in profit per unitD45-D44 500-D18 -900-E18 -900-E41 E45-E44 45 47