Fisher Fixtures manufactures three types of lighting fixtures, with model names of Silver, Gold, and Platinum. It applies all indirect costs according to an annual predetermined rate based on direct labor-hours. The plant controller has recommended that the company switch to an activity-based costing system. The controller's staff prepared the following cost estimates for next year (year 2) for the recommended cost drivers. Activity Recommended Cost Driver Estimated Cost Estimated Cost Driver Activity Purchasing material Number of purchase orders $ 114,000 240 purchase orders Receiving material Direct materials cost 216,000 $ 2,700,000 Setting up equipment Number of production runs 210,000 120 runs Machine depreciation and maintenance Machine-hours 72,000 14,400 hours Ensuring regulatory compliance Number of inspections 421,200 54 inspections Shipping Number of units shipped 1,036,800 576,000 units Total estimated cost $ 2,070,000 In addition, management estimated 45,000 direct labor-hours for year 2. Assume that the following cost-driver volumes occurred in January, year 2: Silver Gold Platinum Number of units produced 32,000 10,000 3,000 Direct labor-hours 2,000 1,200 400 Number of purchase orders 7 6 3 Direct materials costs $ 97,500 $ 60,000 $ 37,500 Number of production runs 2 3 5 Machine-hours 700 175 100 Number of inspections 0 2 3 Units shipped 32,000 10,000 3,000 Labor costs are based on the contractual rate of $25 per hour. Required: Compute the predetermined rate for year 2 for use in the current product-costing system using direct labor-hours as the allocation base. Compute the per-unit production costs for each model for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (a). Compute the predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the controller's staff to be used in an ABC system
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.
Fisher Fixtures manufactures three types of lighting fixtures, with model names of Silver, Gold, and Platinum. It applies all indirect costs according to an annual predetermined rate based on direct labor-hours. The plant controller has recommended that the company switch to an activity-based costing system. The controller's staff prepared the following cost estimates for next year (year 2) for the recommended cost drivers.
| Activity | Recommended Cost Driver | Estimated Cost | Estimated Cost Driver Activity | |
|---|---|---|---|---|
| Purchasing material | Number of purchase orders | $ 114,000 | 240 | purchase orders |
| Receiving material | Direct materials cost | 216,000 | $ 2,700,000 | |
| Setting up equipment | Number of production runs | 210,000 | 120 | runs |
| Machine |
Machine-hours | 72,000 | 14,400 | hours |
| Ensuring regulatory compliance | Number of inspections | 421,200 | 54 | inspections |
| Shipping | Number of units shipped | 1,036,800 | 576,000 | units |
| Total estimated cost | $ 2,070,000 |
In addition, management estimated 45,000 direct labor-hours for year 2.
Assume that the following cost-driver volumes occurred in January, year 2:
| Silver | Gold | Platinum | |
|---|---|---|---|
| Number of units produced | 32,000 | 10,000 | 3,000 |
| Direct labor-hours | 2,000 | 1,200 | 400 |
| Number of purchase orders | 7 | 6 | 3 |
| Direct materials costs | $ 97,500 | $ 60,000 | $ 37,500 |
| Number of production runs | 2 | 3 | 5 |
| Machine-hours | 700 | 175 | 100 |
| Number of inspections | 0 | 2 | 3 |
| Units shipped | 32,000 | 10,000 | 3,000 |
Labor costs are based on the contractual rate of $25 per hour.
Required:
-
Compute the predetermined rate for year 2 for use in the current product-costing system using direct labor-hours as the allocation base.
-
Compute the per-unit production costs for each model for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (a).
-
Compute the predetermined
overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the controller's staff to be used in an ABC system. -
Compute the per unit production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement (c). (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)
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