Question

PARTS D AND E ONLY PLEASE

Case 4

Natha Corporation manufacturers two types of travel mugs: Simple, and Sophisticated. The company budgets to produce 20,000 units of the Simple mugs and 10,000 units of the Sophisticated mugs. Manufacturing takes place in two production departments: Machining and Assembly. The Simple mugs are produced in batches of 200 units; however, due to the more intricate detail included on the Sophisticated mugs, they are produced in batches of 50 units.

The company’s Controller has asked you to compare the plantwide, departmental, and activity-based cost allocation methods. To assist in your analysis, the Controller has provided you with the budgeted cost information for the 2020 fiscal year.

Natha Budgeted Information for the Year Ended December 31, 2020
Machining Department	Simple	Sophisticated	Total
Direct materials cost	$90,000.00	$52,500.00	$142,500.00
Direct labour cost	45,000.00	30,000.00	75,000.00
Overhead costs	120,000.00
Machine hours	12,000	18,000	30,000
Direct labour hours	4,000	1,000	5,000
Assembly Department	Simple	Sophisticated	Total
Direct materials cost	$7,500.00	$15,000.00	$22,500.00
Direct labour cost	22,500.00	37,500.00	60,000.00
Overhead costs	40,000.00
Machine hours	6,000	4,000	10,000
Direct labour hours	3,500	500	4,000

PART A

1. (A) Assume that the corporation is using a single plantwide overhead rate based on machine hours. a. Calculate the manufacturing overhead rate.
2. b. Calculate the total manufacturing cost for each product line.
3. c. Calculate the total manufacturing cost per unit for each product line.

PART B

1. (a) Assume that management at Natha Corporation has decided to use departmental overhead rates. a. Calculate the departmental overhead rates, based on machine hours in the Machining department and direct labour hours in the Assembly department.
2. b. Calculate the total manufacturing cost for each product line.
3. c. Calculate the total manufacturing cost per unit for each product line.

PART C

1. Assume that management at Natha Corporation has decided to implement an activity-based costing system. You have identified three relevant activities. Information for each activity is shown below.

Quantity of Cost Driver
Activities	Cost Driver	Activity Cost	Simple	Sophisticated	Total
Materials handling	Number of parts	$45,000.00	6,000	9,000	15,000
Setups	Number of setups	$74,500.00	104	45	149
Inspection	Inspection hours	$40,500.00	7,500	1,500	9,000
$160,000.00

1. a. Calculate the activity-based costing overhead rates.
2. b. Calculate the total manufacturing cost for each product line.
3. c. Calculate the total manufacturing cost per unit for each product line.

PART D

1. Discuss the advantages and disadvantages of each overhead allocation method mentioned in (A) to (C).

PART E

1. Which method do you recommend Natha Corporation use for its costing system? In your response, please refer to your calculations in (A) to (C).

Answer 1

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Natha
Answer A
Calculation of Plant wide OH Rate	Simple	Sophisticated	Total	Note
Machine hours- Machining	12,000.00	18,000.00	30,000.00	A
Machine hours- Assembly	6,000.00	4,000.00	10,000.00	B
Total Machine hours	18,000.00	22,000.00	40,000.00	C=A+B

	Total	Note
Overhead cost- Machining	120,000.00	D
Overhead cost - Assembly	40,000.00	E
Total overhead cost	160,000.00	F=D+E
Plant wide OH Rate	4.00	G=F/C

Answer A b
Allocation of OH	Simple	Sophisticated	Note
Machine hours	18,000.00	22,000.00	See C
Predetermined OH Rate	4.00	4.00	See G
Allocated OH	72,000.00	88,000.00	H=C*G
Direct materials- Machining	90,000.00	52,500.00
Direct materials- Assembly	7,500.00	15,000.00
Direct labor- Machining	45,000.00	30,000.00
Direct labor- Assembly	22,500.00	37,500.00
Total manufacturing cost	237,000.00	223,000.00	I
Answer A c	Simple	Sophisticated
Total manufacturing cost	237,000.00	223,000.00	See I
Budgeted units	20,000.00	10,000.00	J
Manufacturing cost per unit	11.85	22.30	K=I/J
Answer B
Calculation of departmental OH Rate	Machining	Assembly	Note
Machine/ Labor hours- Simple	12,000.00	3,500.00	L
Machine/ Labor hours- Sophisticated	18,000.00	500.00	M
Total Machine hours	30,000.00	4,000.00	N=L+M
Overhead cost	120,000.00	40,000.00	See F
Departmental OH Rate	4.00	10.00	O=F/N
Answer A b
Allocation of OH- Machining	Simple	Sophisticated
Machine hours	12,000.00	18,000.00	See L
Predetermined OH Rate	4.00	4.00	See O
Allocated OH	48,000.00	72,000.00	P=L*O
Allocation of OH- Assembly
Labor hours	3,500.00	500.00	See L
Predetermined OH Rate	10.00	10.00	See O
Allocated OH	35,000.00	5,000.00	Q=L*O

Manufacturing cost	Simple	Sophisticated
Direct materials- Machining	90,000.00	52,500.00
Direct materials- Assembly	7,500.00	15,000.00
Direct labor- Machining	45,000.00	30,000.00
Direct labor- Assembly	22,500.00	37,500.00
Allocation of OH- Machining	48,000.00	72,000.00	See P
Allocation of OH- Assembly	35,000.00	5,000.00	See Q
Total manufacturing cost	248,000.00	212,000.00	R
Answer A c	Simple	Sophisticated
Total manufacturing cost	248,000.00	212,000.00	See R
Budgeted units	20,000.00	10,000.00	J
Manufacturing cost per unit	12.40	21.20	S=R/J

Answer C a
Calculation of ABC rates for overhead		T	U	V=T/U
Activity cost pool	Cost Driver	Cost	Quantity	ABC rates
Materials handling	Number of parts	45,000.00	15,000.00	3.00
Setups	Number of Setups	74,500.00	149.00	500.00
Inspections	Inspection hours	40,500.00	9,000.00	4.50
Total Cost assigned		160,000.00

		See V	W	X=V*W	Y	Z=Y*V
Allocation table			Simple	Sophisticated
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Materials handling	Number of parts	3.00	6,000.00	18,000.00	9,000.00	27,000.00
Setups	Number of Setups	500.00	104.00	52,000.00	45.00	22,500.00
Inspections	Inspection hours	4.50	7,500.00	33,750.00	1,500.00	6,750.00
				103,750.00		56,250.00

Manufacturing cost	Simple	Sophisticated
Direct materials- Machining	90,000.00	52,500.00
Direct materials- Assembly	7,500.00	15,000.00
Direct labor- Machining	45,000.00	30,000.00
Direct labor- Assembly	22,500.00	37,500.00
Allocation of OH	103,750.00	56,250.00
Total manufacturing cost	268,750.00	191,250.00
Answer C	Simple	Sophisticated
Total manufacturing cost	268,750.00	191,250.00
Budgeted units	20,000.00	10,000.00
Manufacturing cost per unit	13.44	19.13

Answer D

Plant wide OH rate is the simplest method. You don’t have to put so much of your mind or time. Just take total activity used and total costs to arrive at the allocation rate.

Disadvantage is it is too easy to calculate overhead rate. Some products may use more overhead cost than other but cost will be applied to them proportionately. It will create cost distortion.

Departmental overhead rates is also a simple method. You don’t have to put so much of your mind or time. Just take total activity used and total costs to arrive at the allocation rate. Compared to Plant wide OH rate it is more logical.

Disadvantage is some products may use more overhead cost than other but cost will be applied to them proportionately. It will create cost distortion.

ABC method is the most logical method and is accepted everywhere. Each overhead cost will be allocated on the basis of nature and their usages.

Disadvantage is some time it is difficult to allocated all type of overhead cost on the basis of services used.

Answer E

ABC method is always preferable because the ABC method adds competitive advantage to the company's pricing structure by providing accurate cost data.