Question

Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A's production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data has been gathered for the two products:

	Product Data
	Model A	Model B
Units produced per year	10,000	100,000
Prime costs	$153,000	$1,530,000
Direct labor hours	138,000	320,000
Machine hours	18,000	205,000
Production runs	40	70
Inspection hours	1,000	1,000
Maintenance hours	9,000	91,000
Overhead costs:
Setup costs	$275,000
Inspection costs	190,000
Machining	430,000
Maintenance	250,000
Total	$1,145,000

	Required:
1.	Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Round to two decimal places.)
2.	Compute the overhead cost per unit for each product by using ABC. (Round rates and unit overhead cost to two decimal places.)
3.	Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine intensive) with a rate of $3.50 per machine hour and Department 2 (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:

	Department 1	Department 2
	Machine Hours	Direct Labor Hours
Model A	11,000	135,000
Model B	150,000	280,000

	Compute the overhead cost per unit for each product by using departmental rates. (Round to two decimal places.)
4.	CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

Plantwide Rate

1. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Round to two decimal places.)

Plantwide rate:  per DLH

	Model A:  overhead cost per unit
	Model B:  overhead cost per unit

Activity Rates

2. Compute the overhead cost per unit for each product by using ABC. (Round rates and unit overhead costs to two decimal places.)

	Model A:  overhead cost per unit
	Model B:  overhead cost per unit

Note: Be sure to complete both tables below.

Activity	Driver	Activity Rate
Setups		per
Inspections		per
Machining		per
Maintenance		per

Overhead assignment
	Model A	Model B
Setups
Inspections
Machining
Maintenance
Total overhead
÷ Units produced
Overhead per unit

Departmental Rates

3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1: (machine intensive) with a rate of $3.50 per machine hour and Department 2: (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:

	Department 1	Department 2
	Machine Hours	Direct Labor Hours
Model A	11,000	135,000
Model B	150,000	280,000

Compute the overhead cost per unit for each product by using departmental rates. (Round to two decimal places.)

	Model A:  per unit
	Model B:  per unit

Answer 1

1.

Plantwide overhead rate = Budgeted overhead cost / Direct labor hours

Plantwide overhead rate = $1,145,000 / 458,000 = $2.5

Model A = 138,000*$2.5 / 10,000 = $34.5 per unit

Model B = 320,000*$2.5 / 100,000 = $8 per unit

2.

Activity	Driver	Activity rate
Setups	110	$2,500 ($275,000/110)	per production run
Inspection	2,000	95 (190,000/2,000)	per inspection hour
Machining	223,000	1.93 (430,000/223,000)	per machine hour
Maintenance	100,000	2.5 (250,000/100,000)	per maintenance hour

Overhead Assignment
	Model A	Model B
Setups	$100,000 (40*$2,500)	$175,000 (70*$2,500)
Inspection	95,000 (1,000*$95)	95,000 (1,000*$95)
Machining	34,709 (18,000*$1.92827)	395,295 (205,000*$1.92827)
Maintenance	22,500 (9,000*$2.5)	227,500 (91,000*$2.5)
Total overhead	$252,209	$892,795
Units produced	10,000	100,000
Overhead per unit	$25.22	$8.93

3.

Model A = 11,000*$3.50+135,000*$0.90 / 10,000

Model A = $38,500+121,500 / 10,000 = $16 per unit

Model B = 150,000*$3.50+280,000*$0.90 / 100,000

Model B = $525,000+252,000 / 100,000 = $7.77 per unit