AFM102 Lecture Notes - Lecture 8: Cost Driver, Expense, Total Absorption Costing
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| The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are: | ||||||||||||
| Product 1 | Product 2 | |||||||||||
| Direct Labour | $7 | $15 | ||||||||||
| Direct material | $9 | $20 | ||||||||||
| Required: | ||||||||||||
| a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. (5 marks) | ||||||||||||
| Product 1 | Product 2 | Total | Allocation | |||||||||
| Direct Labour hour / unit | 1.5 | 3 | 396,000 / 49,500 | |||||||||
| units produced | 22,000 | 5,500 | 8 | |||||||||
| total labour hour | 33,000 | 16,500 | 49,500 | |||||||||
| overhead/unit | 12 | 24 | overhead/unit is calculated by direct LH x 8 | |||||||||
| Product 1 | Product 2 | |||||||||||
| Direct material | 9 | 20 | ||||||||||
| Direct labour | 7 | 15 | ||||||||||
| overhead/unit | 16 | 35 | ||||||||||
| cost/unit | 32 | 70 | ||||||||||
| b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: (5 marks) | ||||||||||||
| Expected Activity | ||||||||||||
| Activity Costs Pools | Estimated Overhead Costs | Product 1 | Product 2 | Total | ||||||||
| Machine set-ups required | $170,000 | 700 | 1,000 | 1,700 | ||||||||
| Purchase orders issued | 37,000 | 300 | 200 | 500 | ||||||||
| Machine-hours required | 91,000 | 4,000 | 9,000 | 13,000 | ||||||||
| Maintenance requests issued | 98,000 | 400 | 600 | 1,000 | ||||||||
| $396,000 | ||||||||||||
| Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year. | ||||||||||||
| Total Cost | Product A | Product B | ||||||||||
| Machine Setups | 170,000 | 70,000 | 100,000 | |||||||||
| purchase order | 37,000 | 22,200 | 14,800 | |||||||||
| machine hours | 91,000 | 28,000 | 63,000 | |||||||||
| maintenance requests | 98,000 | 39,200 | 58,800 | |||||||||
| Total | 396,000 | 159,400 | 236,600 | |||||||||
| 22,000 | 5,500 | |||||||||||
| overhead /cost | 7..25 | 43..02 | ||||||||||
| product 1 | product 2 | |||||||||||
| Direct Labour | 9 | 20 | ||||||||||
| direct material | 7 | 15 | ||||||||||
| overhead / unit | 7..25 | 43.02. | ||||||||||
| Unit/ cost | 23..25 | 78.020. | ||||||||||
AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.
For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:
Activity | Cost Driver | Allocation Rate |
Material handling | Parts handled | $0.40 |
Lathe work | No. of lathe turns | $0.20 |
Milling | Machine hours | $20.00 |
Grinding | No. of parts ground | $0.80 |
Testing | No. of units tested | $15.00 |
For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:
Job 100 | Job 200 | |
Direct materials cost | $9,700 | $59,900 |
Direct labor cost | $750 | $11,250 |
No. of direct manufacturing labor hours | 25 | 375 |
No. of parts ground | 500 | 2,000 |
No. of lathe turns | 20,000 | 60,000 |
Machine hours | 150 | 1,050 |
No. of units produced during period (all are tested) | 10 | 200 |
Required
1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.
2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.
3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).
4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?
Sweeten Company had no jobs in progress at the beginning of March and no beginning inventories. The company has two manufacturing departments--Molding and Fabrication. It started, completed, and sold only two jobs during MarchâJob P and Job Q. The following additional information is available for the company as a whole and for Jobs P and Q (all data and questions relate to the month of March):
| Molding | Fabrication | Total | |||||||
| Estimated total machine-hours used | 2,500 | 1,500 | 4,000 | ||||||
| Estimated total fixed manufacturing overhead | $ | 15,000 | $ | 18,000 | $ | 33,000 | |||
| Estimated variable manufacturing overhead per machine-hour | $ | 3.40 | $ | 4.20 | |||||
| Job P | Job Q | |||||
| Direct materials | $ | 33,000 | $ | 18,000 | ||
| Direct labor cost | $ | 37,000 | $ | 15,500 | ||
| Actual machine-hours used: | ||||||
| Molding | 3,700 | 2,800 | ||||
| Fabrication | 2,600 | 2,900 | ||||
| Total | 6,300 | 5,700 | ||||
| Sweeten Company had no underapplied or overapplied manufacturing overhead costs during the month. Required: For questions 1-8, assume that Sweeten Company uses a plantwide predetermined overhead rate with machine-hours as the allocation base. For questions 9-15, assume that the company uses departmental predetermined overhead rates with machine-hours as the allocation base in both departments. 1. What was the companyâs plantwide predetermined overhead rate? (Round your answer to 2 decimal places.) 2. How much manufacturing overhead was applied to Job P and how much was applied to Job Q? (Do not round intermediate calculations.) 3. What was the total manufacturing cost assigned to Job P? (Do not round intermediate calculations.) 4. If Job P included 20 units, what was its unit product cost? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 5. What was the total manufacturing cost assigned to Job Q? (Do not round intermediate calculations.) 6. If Job Q included 30 units, what was its unit product cost? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 7. Assume that Sweeten Company used cost-plus pricing (and a markup percentage of 80% of total manufacturing cost) to establish selling prices for all of its jobs. What selling price would the company have established for Jobs P and Q? What are the selling prices for both jobs when stated on a per unit basis assuming 20 units were produced for Job P and 30 units were produced for Job Q? (Do not round intermediate calculations. Round your final answers to nearest whole dollar.) 8. What was Sweeten Companyâs cost of goods sold for March? (Do not round intermediate calculations.) 9. What were the companyâs predetermined overhead rates in the Molding Department and the Fabrication Department? (Round your answers to 2 decimal places.) 10. How much manufacturing overhead was applied from the Molding Department to Job P and how much was applied to Job Q? (Do not round intermediate calculations.) 11. How much manufacturing overhead was applied from the Fabrication Department to Job P and how much was applied to Job Q? (Do not round intermediate calculations.) 12. If Job P included 20 units, what was its unit product cost? (Do not round intermediate calculations.) 13. If Job Q included 30 units, what was its unit product cost? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 14. Assume that Sweeten Company used cost-plus pricing (and a markup percentage of 80% of total manufacturing cost) to establish selling prices for all of its jobs. What selling price would the company have established for Jobs P and Q? What are the selling prices for both jobs when stated on a per unit basis assuming 20 units were produced for Job P and 30 units were produced for Job Q? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 15. What was Sweeten Companyâs cost of goods sold for March? (Do not round intermediate calculations.) | ||||||
