Question
In: Accounting
Problem #1 (Activity-Based Costing) Anderson Company manufactures two products, for which the following estimated information...
Problem #1 (Activity-Based Costing)
Anderson Company manufactures two products, for which the following estimated information for next year is available.
|
Regular |
Deluxe |
|||
|
Selling Price |
$90 |
$130 |
||
|
Number of Units |
45,000 |
5,000 |
||
|
Direct Material per unit |
$30 |
$45 |
||
|
Direct Labor per unit |
$20 |
$20 |
||
|
DLH per unit |
2 |
2 |
||
|
MH (total) |
2,000 |
3,000 |
||
|
Units per batch |
450 |
100 |
||
|
Number of batches |
45,000/450=100 |
5,000/100=50 |
||
A machine is setup once for each batch and the setup is the same regardless of the type of product. There is one inspection performed for each batch and the inspection time is 1.5 hour for the deluxe product and ¼ hour for the regular product. The company purchases raw materials by batch. The purchasing agent has to make eight purchase orders per batch for deluxe product, and four purchase orders per batch for regular product.
The company is considering switching to an ABC system. A recent cost study revealed the company expects $780,000 of overhead next year from the following activities:
|
Activity |
Annual Cost Activity Driver |
|
|
Purchasing |
$100,000 # of purchasing orders (per batch) |
|
|
Quality Control |
$150,000 # of inspection hours (per batch) |
|
|
Production Set-ups |
$30,000 # of setups (per batch) |
|
|
Machine Maintenance |
·$500,000 # of machine hours (total) |
|
|
TOTAL |
$780,000 |
|
Activity |
Total Cost |
Total drivers |
Regular drivers |
Deluxe drivers |
Activity rate |
Consumption ratios |
|
Purchasing |
$100,000 |
|||||
|
Quality Control |
$150,000 |
|||||
|
Production Set-ups |
$30,000 |
|||||
|
Machine Maintenance |
$500,000 |
|||||
|
TOTAL |
$780,000 |
Requirements:
- Assign OH cost for Regular Model using activity rates (show your work).
- Assign OH cost for Deluxe Model using consumption ratios (show your work).
- Determine the gross profit (per unit) of the Regular and Deluxe models using the ABC information.
|
Standard |
Deluxe |
Anderson Company wants to implement reduced approximately relevant ABC system by using the two most expensive activities for cost assignment. Under this new approach, what is the overhead cost assigned to Deluxe Model? (show your work).
Solutions
Expert Solution
| Given Table | |||||
| Regular | Deluxe | ||||
| Selling Price | $90 | $130 | |||
| Number of Units | 45,000 | 5,000 | |||
| Direct Material per unit | $30 | $45 | |||
| Direct Labor per unit | $20 | $20 | |||
| DLH per unit | 2 | 2 | |||
| MH (total) | 2000 | 3000 | |||
| Units per batch | 450 | 100 | |||
| Number of batches | 45,000/450=100 | 5,000/100=50 | |||
| Activity | Annual Cost | Cost Drivers | |||
| Purchasing | $ 1,00,000.00 | purchasing orders (per batch) | |||
| Quality Control | $ 1,50,000.00 | inspection hours (per batch) | |||
| Production Set-ups | $ 30,000.00 | setups (per batch) | |||
| Machine Maintenance | $ 5,00,000.00 | machine hours (total) | |||
| Total | $ 7,80,000.00 | ||||
| Finding cost Drivers | |||||
| Particulars | Regular | Deluxe | |||
| Purchase Orders | |||||
| Per Batch | 4 | 8 | |||
| Total Number of Batches | 100 | 50 | |||
| No. of Purchase Orders | 400 | 400 | |||
| Total Number of Purchase Orders | 800 | ||||
| Inspection Hours | |||||
| Time per Batch | 0.25 | 1.5 | |||
| Total Number of Batches | 100 | 50 | |||
| Number of Inspection Hours | 25 | 75 | |||
| Total Hours | 100 | ||||
| Setups | |||||
| Per Batch | 1 | 1 | |||
| Total Number of Batches | 100 | 50 | |||
| Number of Set ups | 100 | 50 | |||
| Total Number of Setups | 150 | ||||
| Machine Hours | 2000 | 3000 | |||
| Total | 5000 | ||||
| Using ABC Information | |||||
| Calculation of Gross Profit for Each Product | |||||
| Activity | Annual Cost | Cost Drivers | Cost Drivers | Cost per Driver | |
| Purchasing | $ 1,00,000.00 | purchasing orders (per batch) | 800 | 125 | |
| Quality Control | $ 1,50,000.00 | inspection hours (per batch) | 100 | 1500 | |
| Production Set-ups | $ 30,000.00 | setups (per batch) | 150 | 200 | |
| Machine Maintenance | $ 5,00,000.00 | machine hours (total) | 5000 | 100 | |
| Total | $ 7,80,000.00 | ||||
| Particulars | Cost per Driver | Regular | Deluxe | ||
| Cost Driver | Amount | Cost Driver | Amount | ||
| Selling Price | 90 | 130 | |||
| Number of Units | 45000 | 5,000 | |||
| Sales | $ 40,50,000.00 | $ 6,50,000.00 | |||
| Costs | |||||
| Direct Material | $ 13,50,000.00 | $ 2,25,000.00 | |||
| Direct Labor | $ 9,00,000.00 | $ 1,00,000.00 | |||
| Overheads |
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