Chapter C, Problem 1BPSB

To determine

Concept Introduction:

Activity based costing:

Activity based costing can be defined as the costing that assigns cost by assigning costs using factors like cost pools related to a particular overhead and then assign the costs to the products.

Manufacturing overheads:

Manufacturing overheads can be defined as the overheads incurred during the manufacturing process of the product. Only the plant or factory related expenses are termed as manufacturing overheads.

Predetermined overhead rate:

Predetermined overhead rate can defined as the rate allocated on the bases of estimated overheads and a base that can used to determine per unit of allocation of overhead of the base.

Requirement 1

To compute:

Activity overhead rate using ABC

Answer to Problem 1BPSB

Solution:

Production Activity	Activity overhead rate
Wrapping	5
Assembling	20
Product design	60
Obtaining business license	5
Cooking	270

Explanation of Solution

The above answer can be explained as under –

Given,

• Wrapping overheads = $ 500,000 (i.e. $ 300,000 + $ 200,000)

• Assembling overheads = $ 400,000

• Product design overheads = $ 180,000

• Obtaining business license overheads = $ 100,000

• Cooking overheads = $ 270,000 (i.e. $ 150,000 + $ 120,000)

• Units produced = 100,000 units

• Direct labor hours = 20,000 hours

• Design hours = 3,000 hours

• Batches = 1,000 batches

Production Activity	Overheads (A)	Cost pools used	Cost pools given (B)	Activity overhead rate (A) X (B)
Wrapping	500,000	Units	100,000	5
Assembling	400,000	Direct labor hours	20,000	20
Product design	180,000	design hours	3,000	60
Obtaining business license	100,000	Direct labor hours	20,000	5
Cooking	270,000	Batches	1,000	270

Conclusion

Thus, the activity overhead rates have been calculated.

To determine

Requirement 2

To determine:

Cost assigned to –

1. Holiday Basket

2. Executive Basket

Answer to Problem 1BPSB

Solution:

Cost assigned to –

1. Holiday Basket = $ 114,000

2. Executive Basket = $ 73,900

Explanation of Solution

The above answer can be explained as under –

1. For Holiday Basket –

Given,

Activity overhead rates –

Production Activity	Activity overhead rate
Wrapping	5
Assembling	20
Product design	60
Obtaining business license	5
Cooking	270

• Number of units = 8,000 hours

• Direct labor hours = 2,000 hours

• Design hours = 40 design hours

• Batches = 80 batches

Production Activity	Cost pools used	Cost pools given (A)	Activity overhead rate (B)	Total overheads for each activity (A) X (B)
Wrapping	Units	8,000	5	40,000
Assembling	Direct labor hours	2,000	20	40,000
Product design	design hours	40	60	2,400
Obtaining business license	Direct labor hours	2,000	5	10,000
Cooking	Batches	80	270	21,600
Total overheads				114,000

2. For Executive Basket –

Given,

Activity overhead rates –

Production Activity	Activity overhead rate
Wrapping	5
Assembling	20
Product design	60
Obtaining business license	5
Cooking	270

• Number of units = 1,000 units

• Direct labor hours = 500 hours

• Design hours = 40 design hours

• Batches = 200 batches

Production Activity	Cost pools used	Cost pools given (A)	Activity overhead rate (B)	Total overheads for each activity (A) X (B)
Wrapping	Units	1,000	5	5,000
Assembling	Direct labor hours	500	20	10,000
Product design	design hours	40	60	2,400
Obtaining business license	Direct labor hours	500	5	2,500
Cooking	Batches	200	270	54,000
Total overheads				73,900

Conclusion

Thus, the costs assigned to holiday Basket and executive Basket have been determined.

To determine

Requirement 3

To determine:

Overhead cost per unit for –

1. Holiday Basket

2. Executive Basket

Answer to Problem 1BPSB

Solution:

Overhead cost per unit for –

1. Holiday Basket = $ 14.25

2. Executive Basket = $ 73.90

Explanation of Solution

The above answer can be explained as under –

1. For Holiday Basket –

Given,

• Total overhead assigned = $ 114,000 (computed in requirement 2)

• Number of units = 8,000 units

$\begin{array}{l}Overheadcostperunit=\frac{Totaloverheadassigned}{Numberofunits}\hfill \\ Overheadcostperunit=\frac{\$114,000}{8,000units}\hfill \\ Overheadcostperunit=\$14.25perunit\hfill \end{array}$

2. For Executive Basket –

Given,

• Total overhead assigned = $ 73,900 (computed in requirement 2)

• Number of units = 1,000 units

$\begin{array}{l}Overheadcostperunit=\frac{Totaloverheadassigned}{Numberofunits}\hfill \\ Overheadcostperunit=\frac{\$\text{ 73},900}{1,000units}\hfill \\ Overheadcostperunit=\$\text{ 73}.90perunit\hfill \end{array}$

Conclusion

Thus, the overhead cost per unit for holiday and executive have been calculated.

To determine

Requirement 4

To determine:

Overhead cost if a single plantwide overhead rate is used for –

1. Holiday Basket

2. Executive Basket

Answer to Problem 1BPSB

Solution:

Overhead cost if a single plantwide overhead rate is used for –

1. Holiday Basket = $ 18.13 per unit

2. Executive Basket = $ 36.25 unit

Explanation of Solution

The above answers can be explained as under –

Given,

• Wrapping overheads = $ 500,000 (i.e. $ 300,000 + $ 200,000)

• Assembling overheads = $ 400,000

• Product design overheads = $ 180,000

• Obtaining business license overheads = $ 100,000

• Cooking overheads = $ 270,000 (i.e. $ 150,000 + $ 120,000)

• Direct labor hours = 20,000 hours

Total overhead will be calculated –

$\begin{array}{l}\begin{array}{l}Totaloverheads=\left(\begin{array}{l}Wrappingoverheads+Assemblingoverheads\\ +Productdesignoverheads+Obtainingbusinesslicenseoverheads\\ +Cookingoverheads\end{array}\right)\hfill \\ Totaloverheads=\left(\$500,000+\$400,000+\$180,000+\$100,000+\$270,000\right)\hfill \end{array}\\ Totaloverheads=\$1,450,000\end{array}$

Now, per direct labor hour rate will be calculated –

$\begin{array}{l}Perdirectlaborhour=\frac{Totaloverheads}{Directlaborhour}\hfill \\ Perdirectlaborhour=\frac{\$1,450,000}{20,000hours}\hfill \\ Perdirectlaborhour=\$72.50perhour\hfill \end{array}$

Now, the overhead cost per unit will be calculated –

1. For Holiday Basket –

Given,

• Direct labors used = 2,000 hours

• Number of units = 8,000 units

• Per direct labor hour rate = $ 72.50

$\begin{array}{l}Totaloverheads=DirectlaborsusedXPerdirectlaborhourrate\hfill \\ Totaloverheads=2,000hoursX\$72.50perhour\hfill \\ Totaloverheads=\$145,000\hfill \\ Overheadscostperunit=\frac{Totaloverheads}{Numberofunits}\hfill \\ Overheadscostperunit=\frac{\$145,000}{8,000units}\hfill \\ Overheadscostperunit=\$18.13perunit\hfill \end{array}$

2. For Executive Basket –

Given,

• Direct labors used = 500 hours

• Number of units = 1,000 units

• Per direct labor hour rate = $ 72.50

$\begin{array}{l}Totaloverheads=DirectlaborsusedXPerdirectlaborhourrate\hfill \\ Totaloverheads=\text{ 5}00hoursX\$72.50perhour\hfill \\ Totaloverheads=\$\text{ 36},250\hfill \\ Overheadscostperunit=\frac{Totaloverheads}{Numberofunits}\hfill \\ Overheadscostperunit=\frac{\$36,250}{1,000units}\hfill \\ Overheadscostperunit=\$\text{ 36}.25perunit\hfill \end{array}$

Conclusion

Thus, the overhead cost if a single plantwide overhead rate is used has been determined.

To determine

Requirement 5

To compare:

Overhead costs per unit computed in requirements 3 and 4 and explain which method was more appropriate

Answer to Problem 1BPSB

Solution:

The costs in the two requirements can be computed as under –

	Holiday Basket	Executive Basket
Activity based cost per unit	14.25	73.9
Plantwide cost per unit	18.13	36.25

The activity based costing per unit is providing a more accurate cost per unit as activity based costing focuses on the consumption of resources and assigns costs accordingly whereas plantwide rate assigns costs on the basis of number of units produced and direct labors used only. The activity based costing is a better measure as it is using the actual use of resources rather than the plant wide rate, it is ignoring all the other factors.

Explanation of Solution

The above answer can be explained as under –

For the holiday basket, the activity based cost per unit is $ 14.25 and plantwide rate is 18.13 per unit as it is a high-volume product. While for executive basket, the activity based cost per unit is $ 73.90 and plantwide rate is $ 36.25 per unit as it is a low-volume product. This is a clear indication that, activity based costing is taking into consideration all the resources and then assigning the costs to the products, while plantwide rate assigns costs on the basis of number of units produced and direct labors used only. For this reason only, the plant-wide overhead rate for holiday basket is low as it is a high-volume product while the plant-wide overhead rate for executive basket is high as it is a low-volume product clearly stating the rates are not properly allocated.

Conclusion

Thus, the two methods have been compared and explained.