ACTG 2020 Chapter Notes - Chapter 7: Plat, Order Picking, Cost Driver

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23 Feb 2017

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These measures and rates produce average costs that over- or understate individual product costs. Two major factors impair their ability to assign overhead costs accurately: the proportion of non-unit-level overhead costs to total overhead costs is large, the degree of product diversity is great. Plant wide rates or departmental rates assumes that a product"s overhead costs is unit-based (e. g. labour hours/machine hours) Unit-level activities activities performed each time a unit is produced (e. g. assembly costs) Non-unit-level activities activities that are not performed each time a unit is produced (e. g. setup costs) These costs vary with activities/factors that are not-unit based, so identifying these activities/activities will help predict and manage costs. Batch-level (vary with the # of batches that are run) Product-sustaining (these measures and rates produce average costs that over- or understate individual product costs; e. g. utilities expense) Facility sustaining (do not vary with any factor but are necessary in operating the manufacturing facility; pla(cid:374)t (cid:373)a(cid:374)ager"s salary)

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Problem 4-2A (Part Level Submission)

Schultz Electronics manufactures two large-screen televisionmodels: the Royale which sells for $1,546, and a new model, theMajestic, which sells for $1,315. The production cost computed perunit under traditional costing for each model in 2014 was asfollows.

Traditional Costing	Royale	Majestic
Direct Materials	$640	$410
Direct Labor ($20 per hour)	120	100
Manufacturing Overhead ($41 per DLH)	246	205
Total per unit cost	$1006	$715

In 2014, Schultz manufactured 25,000 units of the Royale and10,000 units of the Majestic. The overhead rate of $41 per directlabor hour was determined by dividing total expected manufacturingoverhead of $8,154,010 by the total direct labor hours (200,000)for the two models.

Under traditional costing, the gross profit on the models wasRoyale $540 or ($1,546 â $1,006), and Majestic $600 or ($1,315 â$715). Because of this difference, management is consideringphasing out the Royale model and increasing the production of theMajestic model.

Before finalizing its decision, management asks Schultzâscontroller to prepare an analysis using activity-based costing(ABC). The controller accumulates the following information aboutoverhead for the year ended December 31, 2014.

Activities	Cost Drivers	Estimated Overhead	Expected use of cost Drivers	Activity-Based Overhead Rate
Purchasing	Number of Orders	$1,395,450	39,870	$35/order
Machine setups	Number of Setups	967,250	18,250	53/setup
Machining	Machine hours	4,976,990	121,390	41/hour
Quality control	Number of inspections	814,320	28,080	29/inspection

The cost drivers used for each product were:

Cost Drivers	Royale	Majestic	Total
Purchase orders	16,510	23,360	39,870
Machine setups	5,270	12,980	18,250
Machine hours	75,660	45,730	121,390
Inspections	11,900	16,180	28,080

Assign the total 2014 manufacturing overhead costs to the twoproducts using activity-based costing (ABC) and determine theoverhead cost per unit. (Round cost per unit to 2decimal places, e.g. $12.25.)

	Royale	Majestic
Total assigned costs	$_______________	$_____________
Cost per unit	$_______________	$_____________

chocolatewoodchuck193

Brilliant Accents Company (BAC) manufactures and sells severalstyles of kitchen faucet handles. The companyâs overhead allocationsystem uses direct labor hours as an allocationbase. The following were estimates of 2015âsproduction and some production data for two of its styles.Note that BAC makes more than these two styles ofproduct.

Table 1: Estimates for 2015	BRASS	CHROME
Projected sales in units	30,000	50,000

Per unit data:
Selling price	$40	$20

Direct materials	$ 8	$ 4
Direct labor	$15	$ 3

Hours per 1000-unit batch:
Direct labor hours	40	10
Machine hours	25	25
Setup hours	0.5	1.0
Inspection hours	15	29

Total overhead costs (primarily rent, depreciation and otherfixed costs of the manufacturing plant):	$870,000
	Estimated activity
Direct labor hours	2,900 hours
Machine hours	2,400 hours

The companyâs controller just returned from an all-expenses-paidseminar in Maui on activity-based costing, sponsored by an ABCconsulting firm. There, she surprisingly became convinced ABC wasright for BAC. She decided to re-do 2015âs overhead allocationusing an ABC system. She commissioned a study of the companyâsoverhead costs and the related activities.

Since the examples used in the Maui seminar used setups andinspections, she used those as the activities for her ABC study.The results of her study, showing total overhead costs and activitylevels for the year are:

Table 2: Overhead costs
Activity	Estimated 2015 total activity levels	Total Cost
Setups	95 setup hours	$465,000
Inspections	2,700 inspection hours	$405,000
		$870,000

During 2015, the company had the followingactual results:

Table 3: 2015 actual results

Total overhead costs:	$767,000
Direct labor hours	2,750 hours
Machine hours	2,200 hours

a. (8 points) Using the companyâs traditionalcost allocation system that allocates overhead costs viadirect labor hours, compute the allocatedoverhead costs per unit for the Brass and Chrome faucethandles.

b. (4 points) How much overhead would be over-or under-applied for the year using the traditional system?

c. (4 points) If BAC implements anactivity-based costing system using the data in table 2, determinethe activity cost driver rates for setup costs andinspection costs. Fully label your answer.

d. (8 points) Using the ABC cost allocationsystem, compute the estimated overhead costs perunit for the Brass and Chrome faucet handles.

e. (4 points) Why do the costs calculated bythe two systems differ? Be specific. Generic ornonsense answers wonât get you any points.

f. (3 points) Which cost system (thetraditional or the ABC system) is moreaccurate? That is, which cost system comes closer tocalculating the true, actual overheadcosts per unit for the products listed above? Explain youranswer.

amberelephant141

Problem 4-2A (Part Level Submission)

Traditional Costing	Royale	Majestic
Direct Materials	$640	$410
Direct Labor ($20 perhour)	120	100
Manufacturing Overhead ($41per DLH)	246	205
Total per unit cost	$1006	$715

Activities	Cost Drivers	Estimated Overhead	Expected use of costDrivers	Activity-Based OverheadRate
Purchasing	Number of Orders	$1,395,450	39,870	$35/order
Machine setups	Number of Setups	967,250	18,250	53/setup
Machining	Machine hours	4,976,990	121,390	41/hour
Quality control	Number of inspections	814,320	28,080	29/inspection

The cost drivers used for each product were:

CostDrivers	Royale	Majestic	Total
Purchase orders	16,510	23,360	39,870
Machine setups	5,270	12,980	18,250
Machine hours	75,660	45,730	121,390
Inspections	11,900	16,180	28,080

	Royale	Majestic
Total assigned costs	4304320	3849690
Cost per unit	172.17	384.97

Calculate cost per unit of each model using ABC costing.(Round cost per unit to 2 decimal places, e.g.$12.25.)

	Royale	Majestic
Cost Per Unit	932.16	894.97

Calculate gross profit of each model using ABC costing.(Round answers to 2 decimal places, e.g.$12.25.)

	Royale	Majestic
Gross Profit	$_____________	$_____________

peachcricket436

ACTG 2020 Chapter Notes - Chapter 7: Plat, Order Picking, Cost Driver

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