Question

Problem 9-56 Activity-Based Costing and Predetermined Overhead Rates (LO 9-3,5,6) Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information. The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were: Cost Pools Receiving Manufacturing Machine setup Shipping Costs $ 855,000 11,880,000 1,200,000 $ 1,575,000 Activity Drivers Direct material cost Machine-hours Number of set-ups Units shipped In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations: Total direct material costs Total direct labor costs Total machine-hours Total number of setups Total pounds of material Total direct labor-hours Number of units produced and shipped Products Standard Deluxe $330,000 $240,000 $820,000 $420,000 280,000 160,000 80 120 31,000 15,500 7,000 4,375 20,000 15,000

Please give explanation on how to get each number, thanks!

Answer 1

Total Overheads incurred-

Cost Pools	Costs
Receiving	855000
Manufacturing	11880000
Machine Setup	1200000
Shipping	1575000
Total	15510000

Total overhead of 15510000 to be apportioned on the basis of total machine hours-

Standard- 15510000*280000/(280000+160000) = 9870000

Deluxe- 15510000*160000/(280000+160000) = 5640000

(a)

	Standard	Deluxe
Direct costs	1150000	660000
Overhead	9870000	5640000
Total Cost	11020000	6300000
No. of units	20000	15000
Unit Cost	551	420

(b) Allocation of Overheads using Cost Drivers-

Cost Pool	Costs($)	Cost Drivers	Value of cost driver	Cost per cost driver	Standard	Deluxe
Receiving	855000	Direct Material Cost	570000 (330000+240000)	855000/570000 =1.5	330000*1.5 =495000	240000*1.5 =360000
Manufacturing	11880000	Machine Hours	440000 (280000+160000)	11880000/440000 =27	280000*27 =7560000	160000*27 =4320000
Machine Setup	1200000	No. of Set up	200 (80+120)	1200000/200 =6000	80*6000 =480000	120*6000 =720000
Shipping	1575000	Units Shipped	35000 (20000+15000)	1575000/35000 =45	20000*45 =900000	15000*45 =675000
Total	15510000

	Standard	Deluxe
Direct Costs	1150000	660000
Overheads
Receiving	495000	360000
Manufacturing	7560000	4320000
Machine Setup	480000	720000
Shipping	900000	675000
Total Cost	10585000	6735000
No. of Units	20000	15000
Unit Cost	529.25	449