Question

California​ Dreamin' manufactures​ 1960’s style clothing and accessories. The company produces two main​ products: Floral and​ Tie-Dye. Currently the company uses a traditional overhead rate in which Manufacturing Overhead is allocated to products based on direct labor hours logged. The projected production levels for the period are​ 1,000 units of Floral and 500 units of​ Tie-Dye.

Due to profitability​ concerns, management is considering switching to Activity Based Costing​ (ABC). Management has divided Manufacturing Overhead Costs into three activities and cost​ pools: Assembly​ $32,000; Machine Setup​ $12,000; and Product Movement​ $102,600. Management has identified the following cost drivers for each overhead​ activity: direct labor hours for​ assembly, number of setups for machine​ setup, and number of moves for product movement.

The following information has been compiled for each product​ line:

	Floral	​Tie-Dye
direct labor requirements	0.75 direct labor hours per unit	1.0 direct labor hours per unit
machine setup requirements	1 setup per every 10 units produced	1 setup for every 25 units produced
product movement requirements	1 move per every 25 units produced	1 move per every 25 units produced

The direct material cost for each Floral unit is​ $10.50; the direct material cost for each​ Tie-Dye unit is​ $15.25. Direct laborers are paid at a rate of​ $20 per direct labor hour.

QUESTION​ 1: Using the above​ information, determine the per unit amount by which the​ Tie-Dye line is​ overcosted/undercosted by the current costing system

A.

​$19.28 overcosted

B.

​$9.64 undercosted

C.

​$1.18 overcosted

D.

​$25.01 undercosted

E.

​$20.71 undercosted

QUESTION​ 2: Using the above​ information, complete the following statement . . . Assuming the company marks up costs​ 75% to determine sales​ price, the Floral line is being ​____ (enter the word​ "over" or the word​ "under") priced by ____ per unit ​(round answer to the nearest ​penny).

Answer 1

QUESTION​ 1:

.

current costing system

.

Under current costing system Overhead are allocated based on direct labor hours

Overhead rate = Total overhead / Total labour hour

Where,

Total overhead = Assembly​ $32,000; + Machine Setup​ $12,000; + and Product Movement​ $102,600 = 146600

direct labor requirements

0.75 direct labor hours per unit for Floral of 1000

1.0 direct labor hours per unit Tie-Dye of 500

Total labour hour = ( 0.75 * 1000 ) + ( 500 * 1 ) = 750 + 500 = 1250

.

Overhead rate = 146600 / 1250 = 117.28 per hour

Allocated to Floral = 117.28 * 750 = 87960

Per units basis = 87960 / 1000 = 87.96

.

Allocated to Tie-Dye = 117.28 * 500 = 58640

Per units base = 58640 / 500 = 117.28

.

Product cost

	Floral	Tie-Dye
Direct material	$10.5	$15.25
Direct labour	20 * 0.75 =15	20 * 1 = 20
Overhead	87.96	117.28
Total Cost	113.46	152.53

.

.

Activity based costing

Under ABC, Overhead are classified as each activity and allocate each separately.

.

Overhead allocation

Rate = Activity cost / Activity allocation base ( driver )

.

Assembly​ $32,000

Allocation base = direct labor hour of total; 1250 hours

Rate = 32000 / 1250 = 25.6

.

To Floral = 25.6 * 750 = 19200

To Tie- Dye = 25.6 * 500 = 12800

.

Machine Setup​ $12,000;

Allocation base = machine setup Total

Floral = 1 setup per every 10 units produced = 1000 / 10 = 100 setup

Tie-Dye = 1 setup for every 25 units produced = 500 / 25 = 20 setup

Total setup = 100 + 20 = 120

Rate = 12000 / 120 = 100

.

To Floral = 10 * 100 = 10000

To Tie- Dye = 10 * 20 = 2000

.

Product Movement​ $102,600.

Allocation base = product movement

Floral = 1 move per every 25 units produced = 1000 / 25= 40setup

Tie-Dye = 1 move per every 25 units produced = 500 / 25 = 20 setup

Total setup = 40 + 20 = 60

Rate = 102600 / 60 = 1710

.

To Floral = 1710 * 40 = 68400

To Tie- Dye = 1710 * 20 = 34200

.

Total overhead cost

	Floral	Tie- Dye
Assembly	19200	12800
Machine Setup	10000	2000
Product Movement	68400	34200
Total	97600	49000

Per units basis

Floral = 97600 / 1000 = 97.6

Tie-Dye = 49000 / 500 = 98

.

Product cost

	Floral	Tie-Dye
Direct material	$10.5	$15.25
Direct labour	20 * 0.75 =15	20 * 1 = 20
Overhead	97.6	98
Total Cost	123.1	133.25

Using the above​ information, determine the per unit amount by which the​ Tie-Dye line is​ over costed / under costed by the current costing system ?

,

For Tie-Dye

Under Current costing, product cost = $152.53

Under Activity based costing, product cost = $133.25

.

Ans: A. $19.28 over costed

( 152.53 - 133.25 = 19.28 )

.

QUESTION​ 2: Using the above​ information, complete the following statement . . .

.

Assuming the company marks up costs​ 75% to determine sales​ price, the Floral line is being ​Under priced by $16.875  per unit

.

Price under Current system = 113.46 + 75% = 198.55

Price under ABC = 123.1 + 75% = 215.425

Different under priced = 215.425 - 198.55 = 16.875