Question

The following information relates to Burgundy for July 2020: Actual direct labour costs $50,000 Actual direct labour rate per hour $10 Factory overhead rate per direct labour hour $15 Factory overhead incurred $80,000 As part of the cost planning and cost control of operations and activities, management is concerned regarding the applied overhead rate used. Required a) Identify whether there is an underapplied or overapplied overhead. Assuming underapplied or overapplied overhead is transferred to cost of goods sold at the end of the period, which would be the adjustment to the cost of goods sold account? Aquamarine plans to manufacture two lines of chairs in the coming year – lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver. Activity Cost Activity Driver Material setups $200,000 Number of setups Material handling $150,000 Number of parts Cutting $600,000 Number of parts Assembly $300,000 Direct labour hours Finishing $600,000 Number of units The level of activity for the year is: Lounge Patio Units to be produced 10,000 5,000 Number of setups 60 60 Number of parts per unit 10 5 Direct labour hours per unit 4 2 Required a) Under an activity-based costing system, what is the activity cost per unit of activity driver for assembly? b) Under an activity-based costing system, what is the total cost of lounge chairs for the year?

Answer 1

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Burgundy
Workings for answer a	Amount $	Note
Direct labor cost	50,000.00	A
Direct labor wage rate	10.00	B
Direct labor hours	5,000.00	C=A*B
Answer a	Amount $	Note
Direct labor hours	5,000.00	D
Predetermined overhead rate	15.00	E
Overhead applied	75,000.00	F=D*E
Actual Overhead	80,000.00	See F
Under applied overhead	5,000.00	N=F-L
Answer b
Adjustment Entry
Account	Debit $	Credit $
Cost of goods sold	5,000.00
Factory overhead		5,000.00

Aquamarine
Activity cost pool	Cost Driver	Cost	Lounge	Patio	Total	ABC rates
Material setups	Number of setups	200,000.00	60.00	60.00	120.00	1,666.67
Material handling	Number of parts	150,000.00	100,000.00	25,000.00	125,000.00	1.20
Cutting	Number of parts	600,000.00	100,000.00	25,000.00	125,000.00	4.80
Assembly	Direct labor hours	300,000.00	40,000.00	10,000.00	50,000.00	6.00
Finishing	Number of units	600,000.00	10,000.00	5,000.00	15,000.00	40.00
Total Cost assigned		1,850,000.00

Answer a

Activity cost per unit of activity driver for assembly is $ 6 per direct labor hour.

Answer b			Lounge
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned
Material setups	Number of setups	1,666.67	60.00	100,000.00
Material handling	Number of parts	1.20	100,000.00	120,000.00
Cutting	Number of parts	4.80	100,000.00	480,000.00
Assembly	Direct labor hours	6.00	40,000.00	240,000.00
Finishing	Number of units	40.00	10,000.00	400,000.00
Total Cost assigned				1,340,000.00