Chapter 9, Problem 64P

a.

To determine

Ascertain the unit cost for each of the three jobs started and completed using the current costing system.

Explanation of Solution

Activity-based costing:

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.

Ascertain the unit cost for each of the three jobs started and completed using the current costing system:

Using the direct-labor cost, the predetermined rate using the traditional system is calculated. For the coming year, 16,000 direct-labor hours is estimated by the cost analyst, and an hour of direct labor costs $25 on average. Hence, the estimation of the annual direct-labor cost is $400,000$\left(\$25\times 16,000\text{hours}\right)$.

300% of direct-labor cost $\left(\frac{\$1,200,000}{\$400,000}\right)$ is the predetermined overhead rate.

Using the traditional system, the cost of each of the jobs are:

Particulars	Job 1101	Job 1102	Job 1103
Direct materials	$4,000	$6,000	$5,000
Direct labor	10,000	16,000	13,000
Overhead (@300%)	30,000	48,000	39,000
Total cost	$44,000	$70,000	$57,000
Number of units	200	500	400
Unit cost	$220.00	$140.00	$142.50

Table: (1)

Hence, the unit cost for each of the three jobs started and completed are $220.00, $140.00, and $142.50, respectively.

b.

To determine

Ascertain the unit cost for each of the three jobs started and completed using the ABC system.

Explanation of Solution

Compute the unit product cost:

Particulars	Job 1101	Job 1102	Job 1103
Direct materials	$4,000	$6,000	$5,000
Direct labor	10,000	16,000	13,000
Overhead:
Machining	10,000(1)	14,000	12,000
Assembly	3,000(2)	10,000	4,500
Setup labor	4,000(3)	8,000	4,000
Packaging	300(4)	750	600
Compliance testing	5,000(5)	0	5,000
Total costs	$36,300	$54,750	$44,100
Number of units	200	500	400
Unit cost	$181.50	$109.50	$110.25

Table: (2)

Working Note (1):

Calculate the machining overhead.

$\begin{array}{c}\text{Machining = \$20 per machine hour}\left(6\right)\times \text{500 machine-hours}\\ =\$10,000\end{array}$

Working Note (2):

Calculate the assembly overhead.

$\begin{array}{c}\text{Assembly = Cost per labor-hour}\left(7\right)\times \text{Total labor-hours}\\ =\text{\$12}\text{.50}\times 240\\ =\$3,000\end{array}$

Working Note (3):

Calculate the Setup labor overhead.

$\begin{array}{c}\text{Setup labor = \$4,000 per run}\left(8\right)\times 1\text{run}\\ =\$4,000\end{array}$

Working Note (4):

Calculate the Packaging overhead.

$\begin{array}{c}\text{Packaging = \$1}\text{.50 per unit}\left(9\right)\times \text{200}\text{units}\\ =\$300\end{array}$

Working Note (5):

Calculate the Machining overhead.

$\begin{array}{c}\text{Compliance testing = \$5,000 per order tested}\left(10\right)\times 1\text{order test}\\ =\$5,000\end{array}$

Working Note (6):

Calculate the cost per machine-hour.

$\begin{array}{c}\text{Machining = }\frac{\text{\$400,000}}{\$20,000\text{machine-hours}}\\ =\$20\text{per machine-hour}\end{array}$

Working Note (7):

Calculate the cost per labor-hour.

$\begin{array}{c}\text{Assembly = }\frac{\$200,000}{16,000\text{direct labor hours}}\\ =\$12.50\text{per labor-hour}\end{array}$

Working Note (8):

Calculate the cost per run.

$\begin{array}{c}\text{Setup labor = }\frac{\$320,000}{80\text{run}}\\ =\$4,000\text{per run}\end{array}$

Working Note (9):

Calculate the cost per unit.

$\begin{array}{c}\text{Packaging = }\frac{\$180,000}{120,000\text{units}}\\ =\$1.50\text{per unit}\end{array}$

Working Note (10):

Calculate the cost per order tested.

$\begin{array}{c}\text{Compliance testing = }\frac{\$100,000}{20\text{orders}}\\ =\$5,000\text{per order tested}\end{array}$