Double Bounce Trampolines produces two models of trampolines for backyard fun. The "Original", and the recently introduced "Deluxe". The Deluxe model introduced several safety features that were intended to scare overly protective parents into upgrading. Since its introduction, the deluxe model has been increasing in sales, but at the same time, the company's profits have been declining. The CFO believes that the company's traditional costing system may be to blame. Currently, the company uses direct-labour hours as the basis for applying overhead. The company estimates that it will incur £600,000 in overhead costs in the next year. The following cost data is known: Direct Materials Direct Labour (£10 per hour) Number of Units Produced Original £50 Assembly (Labour Hours) Receiving (Receiving Reports) Testing (Number of Tests) 20 7,000 units The CFO wishes to explore an activity-based costing system Activity (Cost Driver) Estimated MOH £100,000 200,000 300,000 £600,000 Total 20,000 4,000 1,000 Deluxe £75 30 Required: a.) Under the traditional costing method: i. Compute the predetermined overhead rate. ii. Determine the unit cost of each product. b.) Under activity-based costing: i. Compute the activity rates for each activity. ii. Determine the expected unit cost of each product. c.) Compare and comment on your answers from parts a.) and b.) above. 2,000 units Expected Activity Standard 14,000 2,000 200 Deluxe 6,000 2,000 800
Double Bounce Trampolines produces two models of trampolines for backyard fun. The "Original", and the recently introduced "Deluxe". The Deluxe model introduced several safety features that were intended to scare overly protective parents into upgrading. Since its introduction, the deluxe model has been increasing in sales, but at the same time, the company's profits have been declining. The CFO believes that the company's traditional costing system may be to blame. Currently, the company uses direct-labour hours as the basis for applying overhead. The company estimates that it will incur £600,000 in overhead costs in the next year. The following cost data is known: Direct Materials Direct Labour (£10 per hour) Number of Units Produced Original £50 Assembly (Labour Hours) Receiving (Receiving Reports) Testing (Number of Tests) 20 7,000 units The CFO wishes to explore an activity-based costing system Activity (Cost Driver) Estimated MOH £100,000 200,000 300,000 £600,000 Total 20,000 4,000 1,000 Deluxe £75 30 Required: a.) Under the traditional costing method: i. Compute the predetermined overhead rate. ii. Determine the unit cost of each product. b.) Under activity-based costing: i. Compute the activity rates for each activity. ii. Determine the expected unit cost of each product. c.) Compare and comment on your answers from parts a.) and b.) above. 2,000 units Expected Activity Standard 14,000 2,000 200 Deluxe 6,000 2,000 800
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Double Bounce Trampolines produces two models of trampolines for backyard fun. The
"Original", and the recently introduced "Deluxe". The Deluxe model introduced several safety
features that were intended to scare overly protective parents into upgrading. Since its
introduction, the deluxe model has been increasing in sales, but at the same time, the company's
profits have been declining. The CFO believes that the company's traditional costing system
may be to blame. Currently, the company uses direct-labour hours as the basis for applying
overhead. The company estimates that it will incur £600,000 in overhead costs in the next
year.
The following cost data is known:
Direct Materials
Direct Labour (£10 per hour)
Number of Units Produced
Assembly (Labour Hours)
Receiving (Receiving Reports)
Testing (Number of Tests)
Original
£50
20
The CFO wishes to explore an activity-based costing system
Activity (Cost Driver)
7,000 units
Required:
a.) Under the traditional costing method:
Estimated MOH
£100,000
200,000
300,000
£600,000
i. Compute the predetermined overhead rate.
ii. Determine the unit cost of each product.
Total
20,000
4,000
1,000
Deluxe
£75
30
2,000 units
Expected Activity
b.) Under activity-based costing:
i. Compute the activity rates for each activity.
ii. Determine the expected unit cost of each product.
c.) Compare and comment on your answers from parts a.) and b.) above.
d.) If ABC produces more accurate cost data, why is it not more widely used?
Standard Deluxe
14,000
6,000
2,000
2,000
200
800
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