Question

Fanning Electronics produces video games in three market categories: commercial, home, and miniature. Fanning has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	774,000		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			773,100		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			211,700		Research and development	Time spent by research department
Facility			520,000		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

     
Additional data for each of the product lines follow:     

	Commercial				Home				Miniature				Total
Direct materials cost	$	37.00	/unit		$	24.70	/unit		$	29.90	/unit			—
Direct labor cost	$	14.90	/hour		$	14.90	/hour		$	18.20	/hour			—
Number of labor hours		5,800				12,500				2,800				21,100
Number of machine hours		13,000				46,000				31,000				90,000
Number of production orders		250				1,900				1,050				3,200
Research and development time		14	%			20	%			66	%			100	%
Number of units		16,000				45,000				15,000				76,000
Square footage		22,000				51,000				27,000				100,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

(For all requirements, round intermediate calculations for allocation rates to 2 decimal places and all other calculations to the nearest whole dollar. Round "Cost per Unit" to 2 decimal places. Round your answers for "Total Cost" to the nearest whole dollar amount.)

Answer 1

1. Calculation of product using labour overhead rate
	Commercial ($)	Home ($)	Miniature ($)	Total ($)
Direct Material per unit	37	24.7	29.9
Direct Labour cost per unit	14.9	14.9	18.2
Material and labour cost (A)	51.9	39.6	48.1
No of units (B)	16000	45000	15000
Total material and labour cost (A*B)	830400	1782000	721500	3333900
Allocated Overhead	626400	1350000	302400	2278800
Total cost	1456800	3132000	1023900	5612700
No of units	16000	45000	15000
Cost per unit	91.05	69.6	68.26
Explanation:
Calculation of overhead rate
Total labour hours
Product line	Direct labour hours
Commercial	5800
Home	12500
Miniature	2800
	21100
Total Overhead cost	2278800
	(774000+773100+211700+520000)
Overhead rate	Total Overhead cost/ Total Labour Hours
	2278800/21100
	108
Allocation of overhead rate	Commercial	Home	Miniature
Overhead rate (A)	108	108	108
No of labour hours (B)	5800	12500	2800
Total Overhead allocated (A*B)	626400	1350000	302400

2. Calculation of product using Activity based Costing
	Commercial ($)	Home ($)	Miniature ($)	Total ($)
Direct Material per unit	37	24.7	29.9
Direct Labour cost per unit	14.9	14.9	18.2
Material and labour cost (A)	51.9	39.6	48.1
No of units (B)	16000	45000	15000
Total material and labour cost (A*B)	830400	1782000	721500	3333900
Allocated Overhead	316236.44	1162168.13	800395.44	2278800
Total cost	1146636.44	2944168.13	800395.44	4891200
No of units	16000.00	45000.00	15000.00
Cost per unit	71.66	65.43	53.36

Explanation:

Calculation of overhead rate
Activity cost pool	Cost ($) (A)	Cost Driver	Expected activity (B)	Rate (A/B)
Unit	774000	machine Hours	90000	8.60
Batches	773100	No of Production orders	3200	241.59
Facility	520000	Square footage	100000	5.20

Cost allocated to commercial
Cost Pool		rate (A)	activity (B)	cost allocated (A*B)
Unit	machine Hours	8.60	13000.00	111800.00
Batches	No of Production orders	241.59	250.00	60398.44
Facility	Square footage	5.20	22000.00	114400.00
Research & Development cost	Time Spent	211700.00	0.14	29638.00
				316236.44
Cost allocated to Home
Cost Pool		rate (A)	activity (B)	cost allocated (A*B)
Unit	machine Hours	8.60	46000.00	395600.00
Batches	No of Production orders	241.59	1900.00	459028.13
Facility	Square footage	5.20	51000.00	265200.00
Research & Development cost	Time Spent	211700.00	0.20	42340.00
				1162168.13
Cost allocated to Mniature
Cost Pool		rate (A)	activity (B)	cost allocated (A*B)
Unit	machine Hours	8.60	31000.00	266600.00
Batches	No of Production orders	241.59	1050.00	253673.44
Facility	Square footage	5.20	27000.00	140400.00
Research & Development cost	Time Spent	211700.00	0.66	139722.00
				800395.44