Chapter 4, Problem 5PSB

1.

To determine

To compute:Overhead cost assigned to each Pup tent and each Pop-up tent.

Explanation of Solution

Given below is the table for the calculation of plantwide overhead rate:

Plantwide overhead rate
Particulars	($)
Total overhead costs:
Department A	215,630
Department B	399,480
Support	515,600
Total overhead costs$\left[A\right]$	$1,130,710
Total direct labor hours:
Pup tent	2,600 hours
Pop-up tent	1,600 hours
Total number of cases $\left[B\right]$	4,200 hours
Plantwide overhead rate $\left[\frac{\left(A\right)}{\left(B\right)}\right]$	$269.22

Table(1)

Given below is the table for the calculation of overhead cost per unit Pup tent and each Pop-up tent:

Overhead cost
Particulars	Pup tent	Pop-up tent ($)
Direct labor hours$$\left(\text{A}\right)$$	2,600 hours	1,600 hours
Overhead rate $\left(\text{B}\right)$	$269.22	$269.22
Overhead cost$\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)$	$699,972	$430,752
Volume$\left(\text{D}\right)$	15,200 units	7,600 units
Overhead cost per unit$\left[\frac{\left(\text{C}\right)}{\left(\text{D}\right)}\right]$	$46.05	$56.68

Table(2)

Hence, overhead cost to be assigned to each caseof Pup tent and Pop-up tent is $46.05 and 56.68 respectively.

2.

To determine

To compute: Total cost per unit ofPup tent and Pop-up tent.

Explanation of Solution

Given below is the calculation of total cost unit of Pup tent and Pop-up tent:

Total cost per case
Particulars	Pup tent ($)	Pop-up tent ($)
Direct materials and direct labor	25.00	32.00
Overhead	46.05	56.68
Total cost per case	$71.05	$88.68

Table(3)

Hence, total cost per unit of Pup tent is $71.05 and Pop-up tent is $88.68.

3.

To determine

To compute: Gross profit per unit

Explanation of Solution

Given below is the computation of gross profit per of Pup tent and Pop-up tent:

Gross profit per case
Particulars	Pup tent ($)	Pop-up tent ($)
Market price	65.00	200.00
Total cost per case	71.05	$88.68
Gross profit/loss per case	$(6.05)	$111.32

Table(4)

• Pop-up tent is profitable for the company as it has a gross profit of $111.32 whereas Pup tent incurs a loss of $6.05.
• T Company is not advised to produce Pup tent if market price of the same is not increased or it is not able to lower its cost for producing Pup tent.

Hence,gross profit per unit of pop-up tent is $111.32 and Gross loss per unit of Pup tent is $ 6.05.

4.

To determine

To compute: Total cost per case using ABC.

Explanation of Solution

Given below is the calculation of activity rate:

Calculation of activity rate
Activity cost pool	Overhead cost ($)$\left[\text{A}\right]$	Driver	Activity driver $\left[\text{B}\right]$	Activity driver ($) $\left[\text{A}\right]÷\left[\text{B}\right]$
Pattern alignment	64,400	Batches	560	115
Cutting	50,430	machine hours	12,300	4.10
Moving product	100,800	moves	2,400	42
Sewing	327,600	direct labor hours	4,200	78
Inspecting	24,000	inspections	600	40
Folding	47,880	units	22,800	2.10
Design	280,000	modification orders	280	1,000
Providing space	51,600	square feet	8,600	6
Materials handling	184,000	square yards	920,000	0.20

Table(5)

Given below is the calculation of total cost per unit of Pup tent and Pop-up tent as per ABC method:

Total cost per unit
Activity	Quantity per driver		Overhead costs	Pup tent ($)	Pop-up tent ($)
	Pup tent ($)	Pop tent ($)	Cost per driver
Pattern alignment	140	420	115	16,100	48,300
Cutting	7,000	5,300	4.1	28,700	21,730
Moving product	800	1,600	42	33,600	67,200
Sewing	2,600	1,600	78	202,800	124,800
Inspecting	240	360	40	9,600	14,400
Folding	15,200	7,600	2.1	31,920	15,960
Design	70	210	1,000	70,000	210,000
Providing space	4,300	4,300	6	25,800	25,800
Materials handling	450,000	470,000	0.2	90,000	94,000
Total$$\left(\text{A}\right)$$				508,520	622,190
Number of units$\left(\text{B}\right)$				15,200	7,600
Overhead cost per unit$\left[\frac{\left(A\right)}{\left(B\right)}\right]$				$33.46	$81.86
Direct material and direct labor				$25.00	$32.00
Total				$58.45	$113.86

Table(6)

Hence, total cost per unit of Pop tent is $58.45 and Pop-up tent is $113.86.

5.

To determine

To compute: Gross profit per unit.

Explanation of Solution

Given below is the calculation of gross profit per unit of Pup tent and Pop-up tent:

Gross profit per unit
	Pup tent ($)	Pop-up tent ($)
Market price	65.00	200.00
Cost	$58.45	$113.86
Gross profit/loss per case	$9.55	$86.14

• Pop-up tent is more profitable for the company as it has a gross profit of $86.14 whereas Pup tent has gross profit of $9.55.
• T Company is advised to produce more of Pop-up tent.

Hence,gross profit per unit of Pop tent is $9.55 and Pop-up tent is $86.14

6.

To determine

To identify: Effect on pricing analysis if Company uses departmental rates over the plantwide overhead rate.

Explanation of Solution

• Departmental rates are used in companies where several products are manufactured; and different cost drivers are used for different activities.
• Departmental overhead rates use volume related allocation base and hence does not consider activities which drives the manufacturing costs.
• Activity based costing method allocates the cost of each task to all products and services.
• It is preferable to use activity based costing in companies where more than one product is manufactured or more than one services are provided, for more accurate results.
• Activity based costing helps in better controlling of overhead costs.

Hence, ABC helps in better decision making.