Comprehensive Problem II - ABC-1

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101

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Accounting

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May 6, 2024

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Uploaded by ChancellorKouprey4314

Comprehensive Problem II – Worth 50 points Part I Performance Products Corporation makes two products, Titanium Rims and Posts. Data regarding the two products is provided in the following table: Direct Labor Hours per Unit Annual Production Rims 0.40 20,000 units Posts 0.20 80,000 units Additional information about the company follows: a. Rims require $17.00 in direct materials per unit, and Posts require $10.00. b. The direct labor wage rate is $16.00 per hour. c. Rims are more complex to manufacture than Posts , and they require special equipment. d. The Activity Based Costing (ABC) System has the following activity cost pools: Activity Cost Pool Activity Measure Estimated Overhead Cost Rims Posts Total Activity for Rims and Posts Machine Setups Number of Machine Setups $21,600 100 80 180 Special Processing Machine Hours $180,000 4,000 0 4,000 General Factory Direct Labor Hours $288,000 8,000 16,000 24,000 Required - Use the tables on the following page to determine the following required components: In order to receive full credit please show all work!! 1. Compute the activity rate for each activity pool. 2. Determine the amount of manufacturing overhead assigned to each product (Rims and Posts) for each activity cost pool. 3. Determine the unit product cost of each product (Rims and Posts) according to the ABC system. 1

1. Compute the activity rate for each activity pool. Activity Cost Pool Estimated Overhead Cost Expected Activity Activity Rate Machine Setups $21600 $180 $120 Special Processing $180,000 $4,000 $45 General Factory $288,000 $24,000 $12 Work shown : Machine Setups: Activity rate for Machine Setups = $21,600 / 180 The activity rate for Machine Setups = $120 per setup Special Processing: Activity rate for Special Processing = $180,000 / 4,000 Activity rate for Special Processing = $45 per machine hour General Factory: Activity rate for General Factory = $288,000 / 24,000 Activity rate for General Factory = $12 per direct labor hour 2. Overhead is assigned to the two products as follows: Rims: Activity Cost Pool Activity Rate Activity ABC Cost Machine Setups $120 100 $12,000 Special Processing $45 4,000 $180,000 General Factory $12 8,000 $96,000 Total Factory Overhead $288,000 Posts: Activity Cost Pool Activity Rate Activity ABC Cost Machine Setups $120 80 9600 Special Processing $45 0 0 2

General Factory $12 16,000 $192,000 Total Factory Overhead $201,600 3. Determine the total and unit product cost of each product (Rims and Posts) according to the ABC system. Rims Posts $ Direct materials: 340,000 $800,000 $256,000 Direct labor: $128,000 Manufacturing Overhead: $288,000 201,600 $ $37.80 $1,257,600 $15.72 Unit cost $756,000 Part II 1. List and describe the steps (in order) for Implementing Activity Based and Costing. Define and assign costs to the activities which take advantage of resources. Examples are factory setup, general manufacturing or specific processing. Determine the cost drivers that are associated with each activity. A cost driver causes drives and activity’s costs. Compute the cost per rate cost driver unit or transaction. To assign costs to products, take the cost drivers' rate and multiply them by the volume of units that are driven by a product. 3

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2. Identify and describe the limitations of Activity Based Costing. a. Limitations include Cost pool volume. Many cost pools are used in the ABC method, which is a limitation as they tend to grow larger and more expensive to manage. The installation time is then. The ABC system is notoriously difficult to install, because when a company decides to install it, it's the norm to install it over several years. As the months go by, it's hard to finance such an installation. b. Furthermore, we have multidepartment data sources and the ABC system would require multiple departments to input data but each of these could be assigned a higher priority. This increases the risk of data input failures as time goes by. c. We've got a project basis, a great many ABC products are authorized based on projects and therefore data collection can only be carried out one time. This information is useful for a company's current operating situation, but as time goes on it becomes more and more useless. It could be because some managers do not wish to fund further ABC projects in the future. d. There's reporting on wasted time, when a company requires its staff to draw up reports about what they spend their time in the office, it emphasizes achieving 100 percent of that time. Other activities not directly related to work, e.g. social media and breaks, do not fall within this category. Workers usually attribute this time to a different category of work, which deletes the data. e. we've got a separate set of data, an ABC system requires information from more than one source, not only the General Accounting Book. The General Register does not contain all of the information it requires. This information may be very hard to obtain since it requires substantial additional work from which there is little or no means of paying the workers for what they do. f. Finally, regarding Targeted usage, the ABC System is valuable in a company with a complex production environment. However, if the system does not exist in this environment, it may be considered to be imprudent to spend money on an ABC scheme due to the lack of value derived from its information. 4