Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $633,600. Time records from indirect labor employees revealed that they spent 60% of their time setting up production runs and 40% of their time supporting actual production. The following information about cell phones and tablet PCs was determined from the corporate records: Number of Setups Direct Labor Hours Units Cell phones 1,600 2,000 72,000 Tablet PCs 800 2,000 72,000 Total 2,400 4,000 144,000 If required, round your answers to the nearest cent. a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base. Cell phones $fill in the blank 1 per unit Tablet PCs $fill in the blank 2 per unit b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support. Budgeted Activity Cost Activity Rate Setup $fill in the blank 3 $fill in the blank 4 per setup Production support $fill in the blank 5 $fill in the blank 6 per direct labor hour c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing. Cell phones $fill in the blank 7 per unit Tablet PCs $fill in the blank 8 per unit d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)? The per-unit indirect labor costs in (a) are distorted because is consumed by the products in a different ratio from the direct labor. The costing method results in the product with the number of setups receiving a larger portion of the setup activity cost. The allocates overhead only on the basis of direct labor hours. Since the direct labor hours equal for each product, the allocated indirect labor will also equal.
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.
Activity-Based Costing and Product Cost Distortion
Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $633,600.
Time records from indirect labor employees revealed that they spent 60% of their time setting up production runs and 40% of their time supporting actual production.
The following information about cell phones and tablet PCs was determined from the corporate records:
| Number of Setups |
Direct Labor Hours |
Units | ||||||||
| Cell phones | 1,600 | 2,000 | 72,000 | |||||||
| Tablet PCs | 800 | 2,000 | 72,000 | |||||||
| Total | 2,400 | 4,000 | 144,000 |
If required, round your answers to the nearest cent.
a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory
| Cell phones | $fill in the blank 1 per unit |
| Tablet PCs | $fill in the blank 2 per unit |
b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.
| Budgeted Activity Cost | Activity Rate | ||
| Setup | $fill in the blank 3 | $fill in the blank 4 | per setup |
| Production support | $fill in the blank 5 | $fill in the blank 6 | per direct labor hour |
c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.
| Cell phones | $fill in the blank 7 per unit |
| Tablet PCs | $fill in the blank 8 per unit |
d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?
The per-unit indirect labor costs in (a) are distorted because is consumed by the products in a different ratio from the direct labor. The costing method results in the product with the number of setups receiving a larger portion of the setup activity cost. The allocates overhead only on the basis of direct labor hours. Since the direct labor hours equal for each product, the allocated indirect labor will also equal.
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