Question

Tamarisk Company produces two products: MB-R and MB-X. Currently, Tamarisk allocates overhead based on direct labour hours. Overhead is estimated at $392,000. The cost accountant realizes that there are some differences in how resources are being used in producing these two components and is considering the use of ABC to allocate overhead. She determines that overhead is caused by testing and inspections, $108,000; machine setup, $72,000; machine stamping, $160,000; and plant maintenance, $52,000. Tamarisk estimates the following activities related to the overhead costs: Activity Cost Driver MB-R MB-X Testing and inspections Number of testing and inspections 360 360 Machine setup Number of setups 120 80 Machine stamping Number of machine hours 21,000 11,000 Plant maintenance Direct labour hours 1,500 2,500

Use ABC cost hierarchy to classify each activity. Activity Cost Driver Testing and inspections Unit level activities and costsFacility sustaining level activities and costsBatch level activities and costs Machine setup Batch level activities and costsUnit level activities and costsFacility sustaining level activities and costs Machine stamping Batch level activities and costsUnit level activities and costsFacility sustaining level activities and costs Plant maintenance Unit level activities and costsFacility sustaining level activities and costsBatch level activities and costs

Compute the amount of overhead assigned to each product using the traditional (i.e., direct labour hours) costing method. (Round labor rate per hour to 2 decimal places, e.g. 52.75 and the final answers to 0 decimal places, e.g. 5,275.) Overhead assigned MB-R $ MB-X $

Compute the amount of overhead assigned to each product using ABC. Activity MB-R OH MB-X OH Testing and inspections $ $ Machine setup $ $ Machine stamping $ $ Plant maintenance $ $

Which product is overcosted using the traditional costing method? Overcosted product MB-XMB-R

Answer 1

	Calculation Of Predetermined Overhead rate:
	Predtermined Overhead =	Total Estiamted Manufacturing Overhead	"/" By	Total Estimated Direct Lab. Hours
	Predtermined Overhead =	$                           392,000	"/" By	4,000
	Predtermined Overhead =	$                                98.00	Per Hours
Solution: 1
	CALCULATION OF OVERHEAD ASSIGNED TO EACH PRODUCT USING TRADITTIONAL COSTING
	Particulars	MB -R OH	MB -X OH
	No. of Direct Lab. Hrs	1,500	2,500
	"X" Lab. Ovh Rate	$                                98.00	$                           98.00
	Total Overhead	$                           147,000	$                      245,000
Solution: 2
Calculation of the Cost Driver Rate
	Cost Driver Rate = Activity Cost / Cost Driver
	Activity	Cost Driver	Activity Cost	"/" By	Cost Driver	" = " To	Cost Driver Rate
	Testing and Inspection	No. of Testing and Inspection	$                      108,000	"/" By	720	" = " To	$                 150.00
	Machine Setup	No. of Set-ups	$                         72,000	"/" By	200	" = " To	$                 360.00
	Machine Stamping	No. of Machine Hours	$                      160,000	"/" By	32,000	" = " To	$                      5.00
	Plant Maintenance	No. of Labor Hours	$                         52,000	"/" By	4,000	" = " To	$                    13.00
		Total	$                      392,000
	CALCULATION OF OVERHEAD ASSIGNED TO PRODUCT MB-R
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Testing and Inspection	360	"X " By	$                             150	$                   54,000
	Machine Setup	120	"X " By	$                             360	$                   43,200
	Machine Stamping	21,000	"X " By	$                                  5	$                 105,000
	Plant Maintenance	1,500	"X " By	$                                13	$                   19,500
		Total Cost			$                 221,700
	CALCULATION OF OVERHEAD ASSIGNED TO PRODUCT MB-X
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Testing and Inspection	360	"X " By	$                       150.00	$                   54,000
	Machine Setup	80	"X " By	$                       360.00	$                   28,800
	Machine Stamping	11,000	"X " By	$                            5.00	$                   55,000
	Plant Maintenance	2,500	"X " By	$                          13.00	$                   32,500
		Total Cost			$                 170,300
Solution: 3
	Overhead Assigned to Prodcut as below,
		Product MB-R	Product MB-X
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