Question

(25 pts) 3. Herro Corporation has established the following cost pools for 2019. COST POOLS COMMITTED COSTS COST DRIVERS LEVEL Maintenance Materials handling Machine setup Inspection Total $ 40,000 50,000 60,000 50,000 $200,000 Machine hours Number of moves Setup hours Number of inspections 10,000 250 1,000 500 The following information pertains to two representative jobs completed during January 2019. ITEM Job A1 Job B2 Direct materials cost Direct labor cost Number of units Direct labor hours Machine hours Number of material moves Number of setup hours Number of inspections $ 20,000 $ 15,000 3,000 800 800 50 $ 15,000 $8,000 2,000 600 100 40 Required: a) Determine the unit cost of each job using machine hours to allocate all support costs. b) Determine the unit cost of each job using activity-based costing. c) Determine the selling price of each job, if the desired gross profit is 40% and the traditional costing approach was used. d) Determine the selling price of each job, if the desired gross profit is 40% and the activity based costing approach was used. e) Which of the two methods produces more accurate estimates of job costs and profits? Explain. Scanned with CamScanner

Answer 1

Solution:

First we need predetermined OH allocation rate base on machine hour = Total cost / Mach. hours

   = $200,000 / 10,000

= $20 per machine hour

Requirement a. & c.

$ Job A1 20,000 15,000 $ Job B2 15,000 8,000 Direct materials cost Direct labor cost Allocated costs ($20*machine hours) Total cost of Job Number of units Unit cost of each Job $ $ 16,000 51,000 3000 17.00 14,000 37,000 2000 18.50 $ $ Selling price (Total cost *1.40) $ 71,400 $ 51,800

Requirement b. & d. (Activity Based costing) :

Direct materials cost Direct labor cost Maintenance cost Materials handling Machine setup cost Inspection cost Total cost of Job Number of units Unit cost of each Job Job A1 Job B2 $ 20,000 $ 15,000 15,000 8,000 3,200 2,800 10,000 4,000 6,000 3,000 4,000 2,000 $ 58,200 $ 34,800 3000 2000 $ 19.40 $ 17.40 Selling price (Total cost *1.40) $ 81,480 $ 48,720

Requirement e. Activity based costing method is more accurate method to estimated cost and profits because here each type of cost are allocated to Qty. of level of cost drivers used and here each type of costs are properly allocated to each unit of driver based on their exact use.

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