Question

just help with D

units 100 runs Problem B Sunshield Company makes three types of sunglasses: Nerds, Stars, and Fashions Sunshield presently allocates overhead to products using a rate based on direct labor-hours. A consultant recommended that Sunshield switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver. Activity Recommended Costs Est. Cost driver Cost Driver Production setup Production runs $30,000 Order processing Orders $50,000 200 orders Materials handling Pounds of $20,000 8,000 lbs. materials used Equipment Machine-hours $60,000 10,000 mach-hrs depreciation and maintenance Quality management Inspections $50,000 40 inspections Packing and shipping Units shipped $40.000 20,000 units Total Overhead $250,000 In addition, there are 2,500 direct labor-hours in a typical year and direct labor costs are $ 15 per hour. Stars 500 $2.500 100 Fashions 400 $2,000 89 Assume the following activities occurred in February: Nerds Units produced 1,000 Direct materials costs $4.000 Direct labor hours 100 1 Orders Production Runs Pounds of materials 400 Machine-hours 500 Inspections Units Shipped 1,000 200 300 300 500 300 a. Compute an overhead allocation rate (1) for each of the cost drivers recommended by the consultant and (2) for direct labor. b. Management wants to compare the product costs using ABC and the traditional method for the month of February. Compute the production costs for each product for February using direct labor-hours as the allocation base. (Note: Production costs are direct materials, direct labor, and overhead.) c. To derive product costs under ABC, compute the production costs for each product for February using the cost drivers recommended by the consultant. d. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using direct labor-hours as the allocation base and using activity-based costing. Write a brief response to management.

Answer 1

a1 )

Activity	Recommended Drivers	Costs	Est Cost Driver units	Cost driver per unit
Production Setup	Production runs	$30,000	100 runs	300
Order Processing	orders	$50,000	200 orders	250
Material handling	pounds of material used	$20,000	8,000 lbs	2.5
Equipment depreciation and Maintenace	Machine hours	$60,000	10,000 machine hrs	6
Quality Management	Inspections	$50,000	40 inspections	1250
Packing and shipping	units shipped	$40,000	20,000 units	2

a2)

Total overhead cost / Direct labour hrs

=250000/2500

100

b)

	Nerds	Stars	Fashions
Traditional Costing	15.5	28	30.5875
ABC Costing	16.6	26	30.3375

c)

Traditional Method
	Nerds	Stars	Fashions
Units Produced	1000	500	400
Direct material cost	$4,000	$2,500	$2,000
Direct labour hours	1500	1500	1335
Overhead cost	10000	10000	8900
Total Cost	$15,500	$14,000	$12,235
Cost per unit	15.5	28	30.5875
ABC Method
	Cost per driver	Nerds	Stars	Fashions
Units Produced		1000	500	400
Direct material cost		$4,000	$2,500	$2,000
Direct labour cost		1500	1500	1335
Orders	250	2000	2000	1000
Production set up cost	300	600	1200	2400
Material handling	2.5	1000	500	500
Machine hours	6	3000	1800	1800
Inspections cost	1250	2500	2500	2500
Packing and shipping charges	2	2000	1000	600
Total Cost		$16,600	$13,000	$12,135
Cost per unit		16.6	26	30.3375

d)

Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs into direct costs compared to conventional costing

In the given question there is a difference in pricing when we compare both the costing methods

therefore its recommended to follow ABC method as it provides the accurate pricing of the product