ADM 2302 Chapter 3: Business Analytics
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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.
Seacord Company manufactures a product that comes in both adeluxe model and a regular model. The company has manufactured theregular model for years; the deluxe model was introduced severalyears ago to tap a new segment of the market. Since introduction ofthe deluxe model, the company's profits have steadily declined andmanagement has become increasingly concerned about the accuracy ofits costing system. Sales of the deluxe model have been increasingrapidly.
Overhead is assigned to the products on atraditional basis of direct labor-hours. For 2013 the companyestimated that it would incur $900,000 in overhead costs andproduce 5,000 units of the deluxe model and 40,000 units of theregular model. The deluxe model requires two hours of direct labortime, and the regular model requires one hour. Material and laborcosts per unit are as follows:
Deluxe | Regular | |
Direct materials | $50 | $35 |
Direct labor (at $8 per hour) | 16 | 8 |
Required
1. Compute the traditional predetermined overhead rate for 2013,and determine the cost to manufacture one unit of each model.
2. Assume that the company's overhead costs can be traced tofour major activities. These activities, and the amount of overheadcost traceable to each for 2013 are given below:
Number | ||||
Activity | Traceable Costs | Total | Deluxe | Regular |
Purchase orders issued | $204,000 | 600 | 200 | 400 |
Machine-hours required | 182,000 | 35,000 | 20,000 | 15,000 |
Scrap/rework orders issued | 379,000 | 2,000 | 1,000 | 1,000 |
Shipments made | 135,000 | 900 | 250 | 650 |
$900,000 |
Determine the amount of overhead cost per event for each of thefour activities above.
3. Using the data presented or computed in (2) above and anactivity costing approach, do the following.
a. Determine the total amount of overhead cost assignable toeach model for 2013. After these totals have been computed,determine the amount of overhead cost per unit of each model.
b. Compute the total cost to manufacture one unit of each model(materials, labor, and overhead).
4. From the data you have developed in (1) through (3) above,identify factors that may account for the company's decliningprofits.