Question

In: Accounting

Tamarisk Company produces two products: MB-R and MB-X. Currently, Tamarisk allocates overhead based on direct labour...

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

Solutions

Expert Solution

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
As per Tradittional Costing  

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