Selecting Cost Drivers, Assigning Costs Using Activity Rates
Wayward Company makes two models of automobile navigation system, the SeldomLost and the NeverLost.
Its basic production information follows:
| SeldomLost | NeverLost |
Direct materials cost per unit | $ 92 | $115 |
Direct labor cost per unit | $ 51 | $ 75 |
Sales price per unit | $390 | $615 |
Expected production per month | 4,000 units | 9,000 units |
Wayward has monthly overhead of $521,870, which is divided into the following cost pools:
Setup costs | $170,455 |
Quality control | 203,775 |
Maintenance | 65,700 |
Engineering | 81,940 |
Total | $521,870 |
The company has also compiled the following information about the chosen cost drivers:
| SeldomLost | NeverLost | Total |
Number of setups required | 60 | 86 | 146 |
Number of inspections | 975 | 675 | 1,650 |
Number of machine hours | 350 | 650 | 1,000 |
Number of Engineering hours | 352 | 612 | 964 |
Required:
1.Suppose Muffintop used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line.
2. Calculate the production cost per unit for each of Wayward's products under a traditional costing system.
3. Calculate Wayward's gross margin per unit for each product under the traditional costing system.
4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Wayward wanted to implement an ABC system.
5. Assuming an ABC system, assign overhead costs to each product based on activity demands.
6. Calculate the production cost per unit for each of Wayward's products with an ABC system.
7. Calculate Wayward's gross margin per unit for each product under an ABC system.
8. Compare the gross margin of each product under the traditional system and ABC.
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