Brilliant Accents Company (BAC) manufactures and sells several styles of kitchen faucet handles. The companyâs overhead allocation system uses direct labor hours as an allocation base. The following were estimates of 2015âs production and some production data for two of its styles. Note that BAC makes more than these two styles of product.
Table 1: Estimates for 2015
BRASS
CHROME
Projected sales in units
30,000
50,000
Per unit data:
Selling price
$40
$20
Direct materials
$ 8
$ 4
Direct labor
$15
$ 3
Hours per 1000-unit batch:
Direct labor hours
40
10
Machine hours
25
25
Setup hours
0.5
1.0
Inspection hours
15
29
Total overhead costs (primarily rent, depreciation and other fixed costs of the manufacturing plant):
$870,000
Estimated activity
Direct labor hours
2,900 hours
Machine hours
2,400 hours
The companyâs controller just returned from an all-expenses-paid seminar in Maui on activity-based costing, sponsored by an ABC consulting firm. There, she surprisingly became convinced ABC was right for BAC. She decided to re-do 2015âs overhead allocation using an ABC system. She commissioned a study of the companyâs overhead costs and the related activities.
Since the examples used in the Maui seminar used setups and inspections, she used those as the activities for her ABC study. The results of her study, showing total overhead costs and activity levels for the year are:
Table 2: Overhead costs
Activity
Estimated 2015 total activity levels
Total Cost
Setups
95 setup hours
$465,000
Inspections
2,700 inspection hours
$405,000
$870,000
During 2015, the company had the following actual results:
Table 3: 2015 actual results
Total overhead costs:
$767,000
Direct labor hours
2,750 hours
Machine hours
2,200 hours
a. (8 points) Using the companyâs traditional cost allocation system that allocates overhead costs via direct labor hours, compute the allocated overhead costs per unit for the Brass and Chrome faucet handles.
b. (4 points) How much overhead would be over- or under-applied for the year using the traditional system?
c. (4 points) If BAC implements an activity-based costing system using the data in table 2, determine the activity cost driver rates for setup costs and inspection costs. Fully label your answer.
d. (8 points) Using the ABC cost allocation system, compute the estimated overhead costs per unit for the Brass and Chrome faucet handles.
e. (4 points) Why do the costs calculated by the two systems differ? Be specific. Generic or nonsense answers wonât get you any points.
f. (3 points) Which cost system (the traditional or the ABC system) is more accurate? That is, which cost system comes closer to calculating the true, actual overhead costs per unit for the products listed above? Explain your answer.
Brilliant Accents Company (BAC) manufactures and sells several styles of kitchen faucet handles. The companyâs overhead allocation system uses direct labor hours as an allocation base. The following were estimates of 2015âs production and some production data for two of its styles. Note that BAC makes more than these two styles of product.
| Table 1: Estimates for 2015 | BRASS | CHROME |
| Projected sales in units | 30,000 | 50,000 |
| Per unit data: | ||
| Selling price | $40 | $20 |
| Direct materials | $ 8 | $ 4 |
| Direct labor | $15 | $ 3 |
| Hours per 1000-unit batch: | ||
| Direct labor hours | 40 | 10 |
| Machine hours | 25 | 25 |
| Setup hours | 0.5 | 1.0 |
| Inspection hours | 15 | 29 |
| Total overhead costs (primarily rent, depreciation and other fixed costs of the manufacturing plant): | $870,000 | |
| Estimated activity | ||
| Direct labor hours | 2,900 hours | |
| Machine hours | 2,400 hours | |
The companyâs controller just returned from an all-expenses-paid seminar in Maui on activity-based costing, sponsored by an ABC consulting firm. There, she surprisingly became convinced ABC was right for BAC. She decided to re-do 2015âs overhead allocation using an ABC system. She commissioned a study of the companyâs overhead costs and the related activities.
Since the examples used in the Maui seminar used setups and inspections, she used those as the activities for her ABC study. The results of her study, showing total overhead costs and activity levels for the year are:
| Table 2: Overhead costs | ||
| Activity | Estimated 2015 total activity levels | Total Cost |
| Setups | 95 setup hours | $465,000 |
| Inspections | 2,700 inspection hours | $405,000 |
| $870,000 | ||
During 2015, the company had the following actual results:
| Table 3: 2015 actual results | ||
| Total overhead costs: | $767,000 | |
| Direct labor hours | 2,750 hours | |
| Machine hours | 2,200 hours |
a. (8 points) Using the companyâs traditional cost allocation system that allocates overhead costs via direct labor hours, compute the allocated overhead costs per unit for the Brass and Chrome faucet handles.
b. (4 points) How much overhead would be over- or under-applied for the year using the traditional system?
c. (4 points) If BAC implements an activity-based costing system using the data in table 2, determine the activity cost driver rates for setup costs and inspection costs. Fully label your answer.
d. (8 points) Using the ABC cost allocation system, compute the estimated overhead costs per unit for the Brass and Chrome faucet handles.
e. (4 points) Why do the costs calculated by the two systems differ? Be specific. Generic or nonsense answers wonât get you any points.
f. (3 points) Which cost system (the traditional or the ABC system) is more accurate? That is, which cost system comes closer to calculating the true, actual overhead costs per unit for the products listed above? Explain your answer.
