Ramsey Company produces speakers (Model A and Model B).Ramseyâs controller, Mr. Jacks, is evaluating the different methodsof allocating manufacturing overhead to the products. Both productspass through two producing departments. Model Aâs production ismuch more labor-intensive than that of Model B. Model B is alsomore popular of the two speakers. The following data have beengathered for the two products.
Product Data
Model A
Model B
Units produced & sold per year
20,000
200,000
Sales Revenue
$600,000.00
$6,000,000.00
Prime cost
$100,000.00
$1,000,000.00
Direct Labor Hours
140,000
300,000
Machine hours
20,000
180,000
Set Ups
40
160
Inspection runs
600
1,400
Packing Orders
9,000
81,000
Estimated Manufacturing Overhead:
Machining costs
$160,000.00
Setup costs
$180,000.00
Inspection costs
$140,000.00
Packing costs
$180,000.00
Total Manufacturing Overhead
$660,000.00
Suppose that Ramsey decides to use departmental overhead rates.There are two departments: Department 1 (machine intensive) with anMOH rate of $2.75 per machine hour and Department 2 (laborintensive) with an MOH rate of $1.25 per direct labor hour. Theactual consumption of these two drivers is as follows:
Department 1
Department 2
Machine Hours
Direct Labor Hours
Model A
55,000 110,000 Model B
145,000 330,000
Compare the results for the simple cost allocation system(plant-wide), departmental cost allocation and the ABC costallocation systems. Which do you think is more accurate and why? What circumstances would favor Ramseyadopting ABC as their allocation method (provide at least threereasons)?
Ramsey Company produces speakers (Model A and Model B).Ramseyâs controller, Mr. Jacks, is evaluating the different methodsof allocating manufacturing overhead to the products. Both productspass through two producing departments. Model Aâs production ismuch more labor-intensive than that of Model B. Model B is alsomore popular of the two speakers. The following data have beengathered for the two products.
Product Data | ||||
Model A | Model B | |||
Units produced & sold per year | 20,000 | 200,000 | ||
Sales Revenue | $600,000.00 | $6,000,000.00 | ||
Prime cost | $100,000.00 | $1,000,000.00 | ||
Direct Labor Hours | 140,000 | 300,000 | ||
Machine hours | 20,000 | 180,000 | ||
Set Ups | 40 | 160 | ||
Inspection runs | 600 | 1,400 | ||
Packing Orders | 9,000 | 81,000 | ||
Estimated Manufacturing Overhead: | ||||
Machining costs | $160,000.00 | |||
Setup costs | $180,000.00 | |||
Inspection costs | $140,000.00 | |||
Packing costs | $180,000.00 | |||
Total Manufacturing Overhead | $660,000.00 | |||
Suppose that Ramsey decides to use departmental overhead rates.There are two departments: Department 1 (machine intensive) with anMOH rate of $2.75 per machine hour and Department 2 (laborintensive) with an MOH rate of $1.25 per direct labor hour. Theactual consumption of these two drivers is as follows:
Department 1 | Department 2 | |
Machine Hours | Direct Labor Hours | |
Model A | 55,000 | 110,000 |
Model B | 145,000 | 330,000 |
Compare the results for the simple cost allocation system(plant-wide), departmental cost allocation and the ABC costallocation systems. Which do you think is more accurate and why? What circumstances would favor Ramseyadopting ABC as their allocation method (provide at least threereasons)?
