Chapter 4, Problem 3PSA

1.

To determine

To identify:Categorization of overhead activities.

Explanation of Solution

Given below is the categorization of overhead activities:

• Unit level:Activities that are performed on each unit.
• Batch level: Activities that are performed in batches or groups.
• Product level: Activities that are performed separately for each product.
• Facility level:Activities that are performed at the factory or plant level

Given below is the classification of each activity as unit level, batch level, product level or facility level:

• Grinding is a unit level activity.
• Polishing is a unit level activity.
• Product modification is a product level activity.
• Providing power is a facility level activity.
• System calibration is a batch level activity.

Hence, above activities are categorized under unit level, batch level, product level or facility level.

2.

To determine

To compute: Computation of activity overhead rates using ABC.

Explanation of Solution

Given below is the computation of pool activity rates:

Calculation of activity pool rate
Cost pool activity	Driver	Activity cost ($)	Activity pool cost ($)	Driver quantity	Pool rate
Grinding	Machine hours	320,000
Polishing	Machine hours	135,000	455,000	13,000	$35
Product modification	Engineeringhours		600,000	1,500	400
Providing power	Directlaborhours		255,000	17,000	15
System calibration	Batches		500,000	400	1,250
			1,810,000

Table(1)

Hence,activity pool rates have been computed in above table.

3.

To determine

To compute: Overhead costs assigned to job 3175 and job 4286.

Explanation of Solution

Overhead costs are ascertained by multiplying the pool activity rates with cost drivers used for each job.

Given below is the computation of overhead costs assigned to job 3175 and job 4286:

Calculation of overhead costs assigned to job 3175 and job 4286:

Allocation of total overhead cost
		Job 3175		Job 4286
Cost pool activity	Pool rate ($)	Driver quantity	Cost allocated ($)	Driver quantity	Cost allocated ($)
Grinding and polishing	35	550	19,250	5,500	192,500
Product modification	400	26	10,400	32	12,800
Providing power	15	500	7,500	4,375	65,625
System calibration	1250	30	37,500	90	112,500
			74,650		383,425

Table(2)

Hence, overhead cost allocated to job 3715 is $74,650 and job 4286 is $383,425.

4.

To determine

To compute: Overhead cost per unit.

Explanation of Solution

Given below is the computation of overhead cost per unit:

Particulars	Job 3175	Job 4286
Total cost allocated		$74,650	$383,425
Number of units	200	2,500
Overhead cost per unit	$373.25	$153.37

Table(3)

Hence, overhead cost per unit for job 3715 is $373.25 and job 4286 is $153.37.

5.

To determine

To compute: Overhead cost per unit as per plantwide overhead rate based on direct labor hours.

Explanation of Solution

Given,
Grinding is $320,000
Polishing is $135,000
Product modification is $600,000
Providing power is $255,000
System calibration is $500,000
Labor hours of job 3175 is 500 hours
Labor hours of job 4286 is 4875 hours

Formula to calculate overhead cost per unit,

   $\text{Overhead cost per unit}=\frac{\text{Total overheads}}{\text{Total direct labor hours}}$

Formula to calculate total overhead,

   $\text{Total overheads}=\left(\begin{array}{l}\text{Grinding}+\text{Polishing}+\text{Product modification}\\ +\text{Providing power}+\text{System Calibration}\end{array}\right)$

Substitute $320,000 for value of grinding, is $135,000 for value of polishing, $600,000 for the value of product modification, providing power is $255,000 for the value of providing power, $500,000 for the value of System calibration.

   $\begin{array}{c}\text{Total overheads}=\$320,000+\$135,000+\$600,000+\$255,000+\$500,000\\ =\$1,810,000\end{array}$

Formula to calculate total direct labor hours,

   $\text{Total direct labor hours}=\text{Labor hours of job 3175}+\text{Labor hours of job 4286}$

Substitute 500 hours for the value of labor hours of job 3175 and 4875 hours for the value of labor hours of job 4286.

   $\begin{array}{c}\text{Total direct labor hours}=\text{500}\text{hours}+\text{4,375}\text{hours}\\ =\text{4,875 hours}\end{array}$

   $\begin{array}{c}\text{Overhead cost per unit}=\frac{\$810,000}{4,875\text{ hours}}\\ =\$371.28\end{array}$

Hence,overhead cost per units is $371.28 for both jobs.

6.

To determine

To identify: Comparison of overhead cost by both methods.

Explanation of Solution

• It is more useful to use ABC method than plantwide method as ABC method provides more accurate cost allocations which helps in better pricing decisions.
• Plantwide rate uses direct labor hours as its single allocation base and job 4286 has high direct labor hours and hence it is not a fair measure of allocation in this situation.

Hence, activity based costing gives more accurate information than plantwide method.