Question

Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medlum-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators: Three Representative Number of Number of Number of Number of Machine Hours Refrigerators Setups Sales Orders Units Refrigerator-Low Volume 80 19 57 400 Refrigerator-Medium Volume 270 18 127 1,350 13 190 5,100 Refrigerator-High Volume 1,020 Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $400 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows: Sales Order Setup Activity Processing Activity Machining Activity $130 $600 $390 Activity rate a. Complete the following table,, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). If required, round all per unit answers to the nearest cent. Round percents to one decimal place. For column C, use the minus sign to indicate a negative or decrease, Column C Column B Column A АВС Single Rate Overhead Allocation Percent Change in Overhead Allocation Allocation Per Unit Per Unit Product Volume Class % 80 Low во Medium % 80 High

Answer 1

Single Rate computation 400.00 per hour A. Machine hour rate $ B. Total Machine hours (80+270+1020) 1370 hours Total Overheads (Ax B) $5,48,000.00 C. Number of Units (400+1350+5100) 6850 hours Single rate Overhead Allocation per unit $ 80.00 per hour Computation of Overhead Allocation per unit Refrigerator Low Volume i) Allocation of machining activity Activity rate* machine hours/ number of units $390 x 80/ 400 78.00 i) Setup Activity = Activity Rate x No of Setups/Number of units $600 x 19/ 400 28.50 ii) Sales order Processing Activity = Activity rate x No of Sales order/ no of units $130 x 57/400 18.53 Total Allocated Overheads (i+ii+tii) $ 125.03 Refrigerator Medium Volume Activity rate* machine hours/ number of units i) Allocation of machining activity $390 x 270 1350 78.00 ii) Setup Activity Activity Rate x No of Setups/Number of units $600 x 18/1350 8.00 ii) Sales order Processing Activity Activity rate x No of Sales order / no of units $130 x 127/1350 12.23 Total Allocated Overheads (i+ii+iii) $ 98.23

Refrigerator - High Volume i) Allocation of machining activity Activity rate* machine hours/ number of units $390 x 1020/5100 78.00 i) Setup Activity = Activity Rate x No of Setups/Number of units $600 x 13/5100 1.53 ii) Sales order Processing Activity Activity ratex No of Sales order no of units = $130 x 190/5100 4.84 Total Allocated Overheads (itii+ii) 84.37 Column A Column B Column C Column D Product Volume Single Rate ABC Overhead % change in change in class Allocation (B-A) Allocation C/A *100 Allocation Allocation 80.00 $ 125.03 $ 56.28% Low 45.03 80.00 $ 98.23 $ Medium 22.79% 18.23 80.00 $ 84.37 $ High 5.47% 4.37

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