Tas Machinery Ltd manufactures two products, basic and superior, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $960 000 and 25 000 hours, respectively. Information about the company's products follows: Basic: Estimated product volume Direct material cost Direct labour per unit Superior: Estimated product volume Direct material cost Direct labour per unit Basic Superior Total 3.000 units $25 per unit 3 hours at $12 per hour Tas Machinery's overhead of $960 000 can be identified with three major activities: order processing ($180 000),machine processing ($675 000) and product inspection ($105 000). These activities are driven by number of orders processed, machine hours worked and inspection hours, respectively. Data relevant to these activities follow: Order processed 300 200 500 4 000 units $40 per unit 4 hours at $12 per hour Machine hours worked 19 800 20 200 40 000 Inspection hours 2200 7:800 10 000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in profit is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed machinery that was expected to produce significant operating efficiencies. Required: (a) Calculate the unit cost for each product if manufacturing overhead costs are allocated to products on the basis of direct labour hours. (b) Calculate the unit cost for each product if an Activity-based costing is used. (c) Tas Machinery's selling prices are based heavily on cost. Which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each unit product.
Tas Machinery Ltd manufactures two products, basic and superior, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $960 000 and 25 000 hours, respectively. Information about the company's products follows: Basic: Estimated product volume Direct material cost Direct labour per unit Superior: Estimated product volume Direct material cost Direct labour per unit Basic Superior Total 3.000 units $25 per unit 3 hours at $12 per hour Tas Machinery's overhead of $960 000 can be identified with three major activities: order processing ($180 000),machine processing ($675 000) and product inspection ($105 000). These activities are driven by number of orders processed, machine hours worked and inspection hours, respectively. Data relevant to these activities follow: Order processed 300 200 500 4 000 units $40 per unit 4 hours at $12 per hour Machine hours worked 19 800 20 200 40 000 Inspection hours 2200 7:800 10 000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in profit is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed machinery that was expected to produce significant operating efficiencies. Required: (a) Calculate the unit cost for each product if manufacturing overhead costs are allocated to products on the basis of direct labour hours. (b) Calculate the unit cost for each product if an Activity-based costing is used. (c) Tas Machinery's selling prices are based heavily on cost. Which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each unit product.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Tas Machinery Ltd manufactures two products, basic and superior, and applies
overhead on the basis of direct labour hours. Anticipated overhead and direct labour
time for the upcoming accounting period are $960 000 and 25 000 hours,
respectively. Information about the company's products follows:
Basic:
Estimated product volume
Direct material cost
Direct labour per unit
Superior:
Estimated product volume
Direct material cost
Direct labour per unit
Basic
Superior
Total
3 000 units
$25 per unit
3 hours at $12 per hour
Tas Machinery's overhead of $960 000 can be identified with three major activities:
order processing ($180 000),machine processing ($675 000) and product inspection
($105 000). These activities are driven by number of orders processed, machine
hours worked and inspection hours, respectively. Data relevant to these activities
follow:
Order processed
300
200
500
4 000 units
$40 per unit
4 hours at $12 per hour
Machine hours worked
19 800
20 200
40 000
Inspection hours
2 200
7:800
10 000
Top management is very concerned about declining profitability despite a healthy
increase in sales volume. The decrease in profit is especially puzzling because the
company recently undertook a massive plant renovation during which new, highly
automated machinery was installed machinery that was expected to produce
significant operating efficiencies.
Required:
(a) Calculate the unit cost for each product if manufacturing overhead costs are
allocated to products on the basis of direct labour hours.
(b) Calculate the unit cost for each product if an Activity-based costing is used.
(c) Tas Machinery's selling prices are based heavily on cost. Which product is
overcosted and which product is undercosted? Calculate the amount of the cost
distortion for each unit product.
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