1. Assuming the use of direct labor hour to apply overhead to production, compute the manufacturing cost of the and B products if the expected manufacturing volume is attained. 2. Assuming the use of activity-based costing, compute the unit manufacturing costs of the A and B products if the expected manufacturing volume is attained.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
![GoodHealth's Inc. manufactures two types of medical devices, A and B, and applies
overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor
time for the upcoming accounting period are $710,000 and 20,000 hours respectively.
Information about the company's product is as follows:
Product A
Estimated production volume, 2500 units. Direct material cost, $30 per unit, Direct
labor per unit, 3 hours at $15 per hour
Product B
Estimated production volume, 3125 units. Direct material cost, $45 per unit. Direct
labor per unit, 4 hours at $15 per hour"|
GoodHealth's overhead of $710000 can be identified with 3 major activities: order
processing ($120000), machine processing ($500000) and product inspection ($90000)
These activities are driven by the number of orders processed, machine hours worked
and inspection hours, respectively. Relevant data for these activities is as follows:
ORDERS
PROCESSED
MACHINE HOURS
WORKED
INSPECTION
HOURS
A
350
23000
4000
250
27000
11000
Total
600
50000
15000
Management is very concerned about declining profitability, despite a healthy increase
in sales volume. The decrease in income is especially puzzling because the company
recently a large renovation during which new, highly automated machines were
installed; this machinery was expected to produce significant operating efficiencies.
1. Assuming the use of direct labor hour to apply overhead to production, compute the
manufacturing cost of the and B products if the expected manufacturing volume is
attained.
2. Assuming the use of activity-based costing, compute the unit manufacturing costs
of the A and B products if the expected manufacturing volume is attained.
3. GoodHealth's selling prices are based heavily on cost,
a. By using direct application hours as an application base, which product is over
costed and which product is under costed? Calculate the amount of cost distortion for
each product.
b. Is it possible that overcosting and undercosting (the cost distortion) and the
subsequent determination of selling prices are contributing the company's financial
difficulties? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcd49813b-3917-4550-acd9-54e8e94c0e87%2Fa008b9db-c7a8-4843-8512-bd4a82fe2906%2Fxdn3uf_processed.jpeg&w=3840&q=75)
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