Question

Okay Accents Company manufactures and sells three styles of bathroom faucets: Nickel, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of nickel, chrome, and white faucets, respectively. The following additional data apply:

                                                      NICKEL           CHROME        WHITE

Projected sales in units                   32,000                 50,000           40,000

PER UNIT data:                                

Selling price                                      $35                     $20                $30

Direct materials                                 $ 8                      $ 4                 $ 8

Direct labor                                       $15                     $ 3                 $ 9

Overhead cost based on direct labor hours

(traditional system)                            $13                     $ 3                 $ 9

Hours per 1000-unit batch:

Direct labor hours                               40                       10                  30

Machine hours                                    25                      25                  10

Setup hours                                        1.5                       0.5                 1.0

Inspection hours                                 30                        20                  20

Total overhead costs and activity levels for the year are estimated as follows

Activity                            Overhead costs             Activity levels

Direct labor hours                                                2,900 hours

Machine hours                                                       2,400 hours

Setups                            $465,500                        95 setup hours

Inspections                    $405,000                        2,700 inspection hours

Total                              $870,500

a. Using the traditional system, determine the operating profit or loss per unit for the nickel style of faucet.
b. Determine the activity-cost-driver rate for setup costs and inspection costs.
Using the ABC system, for the nickel style of faucet:
c. compute the estimated overhead costs per unit.
d. compute the estimated operating profit per unit.

Answer 1

Solution:

Part a – Operating Profit or loss per unit for nickel style of faucet using traditional costing

	Nickel
Selling Price	$35
Manufacturing Cost per unit:
Direct materials	$8
Direct Labor	$15
Overhead Cost per unit	$13
Manufacturing Cost Per Unit	$36
Operating Profit or (Loss) per unit	($1)

Part b – Activity Cost Driver Rate for setup costs and inspection costs

Activity Cost Driver Rate for Setup Costs = Total Setup Costs / Number of setup hours

= $465,500 / 95 Setup hours

= $4,900 per setup hour

Activity Cost Drive Rate for Inspection Costs = Total Inspection Costs / Number of Inspection Hours

= $405,000 / 2700 Inspection Hours

= $150 per inspection hour

Part c – Estimated Overhead Cost per unit (ABC System)

Allocation of Overhead	NICKEL
	Expected Usage of Activity per 1000-Unit Batch	Activity Cost Driver Rate	Assigned Overhead
Setup	1.5	$4,900	$7,350
Inspection	30	$150	$4,500
Total Allocated Overheads			$11,850
Number of Units in a Batch			1,000 Units
Overhead Costs Per Unit (Total Allocated Overheads / Units)			$11.85

Overhead Cost Per Unit for Nickel = $11.85

Part d – Estimated Operating Profit per unit (ABC System) – NICKEL

	Nickel
Selling Price	$35.00
Manufacturing Cost per unit:
Direct materials	$8.00
Direct Labor	$15.00
Overhead Cost per unit	$11.85
Manufacturing Cost Per Unit	$34.85
Operating Profit or (Loss) per unit	$0.15

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you