Problem 5-54 Plantwide versus Departmental Rates, Product-Costing Accuracy: Activity-Based Costing Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A’s production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products: Product Data Model A Model B Units produced per year 10,000 100,000 Prime costs $150,000.00 $1,500,000.00 Direct labor hours' 140,000 300,000 Machine hours 20,000 200,000 Production runs 40 60 Inspection hours 800 1,200 Maintenance hours 10,000 90,000 Overhead costs: Setup costs $270,000.00 Inspection costs 210,000 Machining 240,000 Maintenance 270,000 Total $990,000.00 Required: Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Note: Round to two decimal places).
Problem 5-54 Plantwide versus Departmental Rates, Product-Costing Accuracy: Activity-Based Costing
Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A’s production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products:
|
Product Data |
||
|
Model A |
Model B |
|
|
Units produced per year |
10,000 |
100,000 |
|
Prime costs |
$150,000.00 |
$1,500,000.00 |
|
Direct labor hours' |
140,000 |
300,000 |
|
Machine hours |
20,000 |
200,000 |
|
Production runs |
40 |
60 |
|
Inspection hours |
800 |
1,200 |
|
Maintenance hours |
10,000 |
90,000 |
|
|
||
|
Setup costs |
$270,000.00 |
|
|
Inspection costs |
210,000 |
|
|
Machining |
240,000 |
|
|
Maintenance |
270,000 |
|
|
Total |
$990,000.00 |
Required:
- Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Note: Round to two decimal places).
- Compute the overhead cost per unit for each product by using ABC. (Note: Round rates and unit overhead costs to two decimal places.)
- Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine-intensive) with a rate of $3.50 per machine hour and Department 2 (labor-intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:
|
Department 1 |
Department 2 |
|
|
Machine Hours |
Labor Hours |
|
|
Model A |
10,000 |
130,000 |
|
Model B |
170,000 |
270,000 |
Compute the overhead cost per unit for each product by using departmental rates. (Note: Round to two decimal places.)
- CONCEPTUAL CONNECTION. Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the department rates do better than the plantwide rate?
Problem 5-55 Production-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers
Willow Company produces lawnmowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant:
|
Basic Model |
Deluxe Model |
|
|
Expected quantity |
40,000 |
20,000 |
|
Selling price |
$180 |
$360 |
|
Prime costs |
$80 |
$160 |
|
Machine hours |
5,000 |
5,000 |
|
Direct labor hours |
10,000 |
10,000 |
|
Engineering support (hours) |
1,500 |
4,500 |
|
Receiving (orders processed) |
250 |
500 |
|
Materials handling (number of moves) |
1,200 |
4,800 |
|
Purchasing (number of requisitions) |
100 |
200 |
|
Maintenance (hours used) |
1,000 |
3,000 |
|
Paying suppliers (invoices processed) |
250 |
500 |
|
Setting up equipment (number of setups) |
16 |
64 |
Additionally, the following overhead activity costs are reported:
|
Maintaining equipment |
$114,000 |
|
|
Engineering support |
120,000 |
|
|
Materials handling |
? |
|
|
Setting up equipment |
96,000 |
|
|
Purchasing materials |
60,000 |
|
|
Receiving goods |
40,000 |
* |
|
Paying suppliers |
30,000 |
|
|
Providing space |
20,000 |
|
|
Total |
$? |
|
|
* Receiving activity cost includes allocated share of forklift operator's salaries |
Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $40,000 each. The operator spends 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs $3 per move. Depreciation amounts to $8,000 per forklift per year.
Required: (Note: Round answers to two decimal places).
- Calculate the costs of the material handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers.
- Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs.
- Calculate activity rates, and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2.
- Calculate consumption ratios for each activity.
- CONCEPTUAL CONNECTION. Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.
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