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Business Accounting EBK HORNGREN'S ACCOUNTING

Predetermined Overhead allocation rate: The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. The formula to calculate the Predetermined Overhead allocation rate is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e 1. Total Indirect Cost To determine: The indirect cost allocated to both the products, i.e., commercial containers and travel packs using single plant wide overhead allocation method. Later, the indirect cost per unit needs to be computed. Solution: The Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Total Indirect Cost or Allocated Overhead $ 274,400 $ 71,400 Indirect Cost per unit $ 98 $ 1.40 Explanation: The Calculation of Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Machine Hours (A) 1960 510 Single Plant wide overhead allocation rate (B) $ 140 $ 140 Allocated Overhead (C) = A*B = $ 274,400 $ 71,400 Units Produced (D) 2800 51000 Indirect Cost per unit (C/D) $ 98 $ 1.40 Total Indirect Cost or Allocated Overhead is calculated by multiplying the Machine Hours with Single Plant wide overhead allocation rate. Indirect Cost per unit is calculated by dividing the Total Indirect Cost or Allocated Overhead by unit produced. Conclusion: Hence, Single plant wide overhead allocation is used to calculate the indirect cost for each product. 2. Predetermined Overhead allocation rate To determine: The Predetermined Overhead allocation rate for each activity. Solution: The Predetermined Overhead allocation rate for each activity is as follows: Activity Predetermined Overhead allocation rate Material Handling $ 4 per kilo Packaging $ 70 per machine hours Quality Assurance $ 60 per samples Explanation: Formula used: The formula used to calculate the Predetermined Overhead allocation rate for each activity is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. The Calculation of the Predetermined Overhead allocation rate for each activity is explained as follows: Activity Total Estimated Overhead Cost Total Estimated Allocation base Predetermined Overhead allocation rate A B =A/B Material Handling $ 96,000 24000 killos $ 4 per kilo Packaging $ 210,000 3000 machine hours $ 70 per machine hours Quality Assurance $ 114,000 1900 Samples $ 60 per samples Conclusion: Hence, the Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. 3. Activity based cost per unit To determine: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity. Solution: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is as follows: Commercial Containers Travel Packs Activity based cost per unit $ 75.00 $ 2.00 Explanation: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is explained as follows: First the calculation of Total Activity based cost for each product is done as follows: Calculation of Total Activity based cost: Commercial Containers Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total Activity based Overhead Cost A B =A*B Material Handling 9800 killos $ 4 $ 39,200 Packaging 1960 machine hours $ 70 $ 137,200 Quality Assurance 560 Samples $ 60 $ 33,600 Total Activity based Overhead Cost $ 210,000 Travel Packs Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total allocated Overhead Cost A B =A*B Material Handling 5100 killos $ 4 $ 20,400 Packaging 510 machine hours $ 70 $ 35,700 Quality Assurance 765 Samples $ 60 $ 45,900 Total Activity based Overhead Cost $ 102,000 Now the Calculation of Activity based cost per unit is as follows: Calculation of Activity based cost per unit: Commercial Containers Travel Packs Total Activity based Overhead Cost (A) $ 210,000 $ 102,000 Units Produced (B) 2800 51000 Activity based cost per unit = A/B = $ 75.00 $ 2.00 Conclusion: Hence, Activity based cost per unit for Commercial Containers is $75 and for Travel Packs is $2. 4. Comparison Activity based cost per unit To explain: Comparison between per unit cost computed using activity-based costing method and single plant wide overhead allocation method along with the nature and reason for such change. Solution: The comparison Activity based cost per unit under both methods is as follows: Single Plant wide overhead allocation method Activity Based method Commercial Containers $ 98.00 $ 75.00 Travel Packs $ 1.40 $ 2.00 Explanation: The per unit cost for ‘commercial containers’ is lower when considering activity-based costing method i.e. $75 per unit while it is lower using single plant wide overhead allocation method for ‘travel packs’ i.e. $1.4 per unit. % change in costs for commercial containers = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 2 ) × 100 % change in costs for commercial containers = { $98 - $75 } $75 × 100 % change in costs for commercial containers = $23 $75 × 100 % change in costs for commercial containers = 30 .67% % change in costs for travel packs = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 1 ) × 100 % change in costs for travel packs = ( $2 - $1 .4 ) $1 .4 × 100 % change in costs for travel packs = $0 .6 $1 .4 × 100 % change in costs for travel packs = 42 .86% This clearly means that the difference in per unit cost between both the methods was more for travel packs when compared to commercial containers. Reason for difference in per unit cost: Single plant wide overhead allocation method is applied for the whole indirect manufacturing cost at once and it ignores the different activities of the manufacturing. The activity based overhead allocation rate is calculated separately for each activity and accordingly the indirect costs are allocated to the products. Conclusion: Hence, cost allocated under both methods are different.

Predetermined Overhead allocation rate: The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. The formula to calculate the Predetermined Overhead allocation rate is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e 1. Total Indirect Cost To determine: The indirect cost allocated to both the products, i.e., commercial containers and travel packs using single plant wide overhead allocation method. Later, the indirect cost per unit needs to be computed. Solution: The Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Total Indirect Cost or Allocated Overhead $ 274,400 $ 71,400 Indirect Cost per unit $ 98 $ 1.40 Explanation: The Calculation of Indirect cost in total and per unit allocated on the basis of single plant wide overhead allocation rate is as follows: Commercial Containers Travel Packs Machine Hours (A) 1960 510 Single Plant wide overhead allocation rate (B) $ 140 $ 140 Allocated Overhead (C) = AB = $ 274,400 $ 71,400 Units Produced (D) 2800 51000 Indirect Cost per unit (C/D) $ 98 $ 1.40 Total Indirect Cost or Allocated Overhead is calculated by multiplying the Machine Hours with Single Plant wide overhead allocation rate. Indirect Cost per unit is calculated by dividing the Total Indirect Cost or Allocated Overhead by unit produced. Conclusion: Hence, Single plant wide overhead allocation is used to calculate the indirect cost for each product. 2. Predetermined Overhead allocation rate To determine: The Predetermined Overhead allocation rate for each activity. Solution: The Predetermined Overhead allocation rate for each activity is as follows: Activity Predetermined Overhead allocation rate Material Handling $ 4 per kilo Packaging $ 70 per machine hours Quality Assurance $ 60 per samples Explanation: Formula used: The formula used to calculate the Predetermined Overhead allocation rate for each activity is as follows: P r e d e t e r m i n e d O v e r h e a d a l l o c a t i o n r a t e = T o t a l E s t i m a t e d o v e r h e a d c o s t T o t a l E s t i m a t e d a l l o c a t i o n b a s e Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. The Calculation of the Predetermined Overhead allocation rate for each activity is explained as follows: Activity Total Estimated Overhead Cost Total Estimated Allocation base Predetermined Overhead allocation rate A B =A/B Material Handling $ 96,000 24000 killos $ 4 per kilo Packaging $ 210,000 3000 machine hours $ 70 per machine hours Quality Assurance $ 114,000 1900 Samples $ 60 per samples Conclusion: Hence, the Predetermined Overhead allocation rate is calculated by dividing the Total Estimated Overhead Cost by Total Estimated Allocation base. 3. Activity based cost per unit To determine: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity. Solution: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is as follows: Commercial Containers Travel Packs Activity based cost per unit $ 75.00 $ 2.00 Explanation: The Activity based cost per unit for each product using the Predetermined Overhead allocation rate for each activity is explained as follows: First the calculation of Total Activity based cost for each product is done as follows: Calculation of Total Activity based cost: Commercial Containers Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total Activity based Overhead Cost A B =AB Material Handling 9800 killos $ 4 $ 39,200 Packaging 1960 machine hours $ 70 $ 137,200 Quality Assurance 560 Samples $ 60 $ 33,600 Total Activity based Overhead Cost $ 210,000 Travel Packs Activity Total Estimated Allocation base Predetermined Overhead allocation rate Total allocated Overhead Cost A B =A*B Material Handling 5100 killos $ 4 $ 20,400 Packaging 510 machine hours $ 70 $ 35,700 Quality Assurance 765 Samples $ 60 $ 45,900 Total Activity based Overhead Cost $ 102,000 Now the Calculation of Activity based cost per unit is as follows: Calculation of Activity based cost per unit: Commercial Containers Travel Packs Total Activity based Overhead Cost (A) $ 210,000 $ 102,000 Units Produced (B) 2800 51000 Activity based cost per unit = A/B = $ 75.00 $ 2.00 Conclusion: Hence, Activity based cost per unit for Commercial Containers is $75 and for Travel Packs is $2. 4. Comparison Activity based cost per unit To explain: Comparison between per unit cost computed using activity-based costing method and single plant wide overhead allocation method along with the nature and reason for such change. Solution: The comparison Activity based cost per unit under both methods is as follows: Single Plant wide overhead allocation method Activity Based method Commercial Containers $ 98.00 $ 75.00 Travel Packs $ 1.40 $ 2.00 Explanation: The per unit cost for ‘commercial containers’ is lower when considering activity-based costing method i.e. $75 per unit while it is lower using single plant wide overhead allocation method for ‘travel packs’ i.e. $1.4 per unit. % change in costs for commercial containers = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 2 ) × 100 % change in costs for commercial containers = { $98 - $75 } $75 × 100 % change in costs for commercial containers = $23 $75 × 100 % change in costs for commercial containers = 30 .67% % change in costs for travel packs = { Cost using ( 1 ) – Cost using ( 2 ) } Cost using ( 1 ) × 100 % change in costs for travel packs = ( $2 - $1 .4 ) $1 .4 × 100 % change in costs for travel packs = $0 .6 $1 .4 × 100 % change in costs for travel packs = 42 .86% This clearly means that the difference in per unit cost between both the methods was more for travel packs when compared to commercial containers. Reason for difference in per unit cost: Single plant wide overhead allocation method is applied for the whole indirect manufacturing cost at once and it ignores the different activities of the manufacturing. The activity based overhead allocation rate is calculated separately for each activity and accordingly the indirect costs are allocated to the products. Conclusion: Hence, cost allocated under both methods are different.

EBK HORNGREN'S ACCOUNTING

EBK HORNGREN'S ACCOUNTING

12th Edition

ISBN: 9780134487212

Author: MILLER-NOBLES

Publisher: PEARSON CO

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EBK HORNGREN'S ACCOUNTING

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What is Cost Allocation? Definition & Process; Author: FloQast;https://www.youtube.com/watch?v=hLhvvHvZ3JM;License: Standard Youtube License