Question

Carter Company manufactures two products, Deluxe and Regular, and uses a traditional two-stage cost allocation system. The first stage assigns all factory overhead costs to two production departments, A and B, based on machine hours. The second stage uses direct labor hours to allocate overhead to individual products.

For the current year, the firm budgeted $1,350,000 total factory overhead cost. The $1,350,000 was for the planned levels of machine and direct labor hours shown in the following table.

	Production Department A			Production Department B
Machine hours		5,400			21,600
Direct labor hours		27,000			13,500

The following information relates to the firm’s operations for the month of January:

	Deluxe			Regular
Units produced and sold		270			1,080
Unit cost of direct materials	$	135		$	67.50
Hourly direct labor wage rate	$	25		$	27
Direct labor hours in Department A per unit		2			2
Direct labor hours in Department B per unit		1			1

Carter Company is considering implementing an activity-based costing system. Its management accountant has collected the following information for activity cost analysis for the current year:

	Budgeted				Budgeted		Driver Consumption
Activity	Overhead			Cost Driver	Quantity		Deluxe		Regular
Material movement	$	9,450		Number of production runs	403.00		20.00		27
Machine setups		540,000		Number of setups	675		34.00		68.00
Inspections		793,800		Number of units	26,460		270		1,080
Shipment		6,750		Number of shipments	338.00		68.00		135
	$	1,350,000

Required:

1. Calculate the unit cost for each of the two products under the existing volume-based costing system. (Round "Regular unit cost" to 2 decimal places.)

2. Calculate the overhead per unit of the cost driver under the proposed ABC system.

3. Calculate the unit cost for each of the two products if the proposed ABC system is adopted. (Round your intermediate calculations to 1 decimal place and final answers to 2 decimal places.)

Answer 1

1. Volume based costing

first stage allocation-Machine hours

Total machine hours = 5,400+21,600

=27,000

Pre determined OH rate per machine hour = Total cost/ Total machine hours

$1,350,000/27,000

=$50 per machine hour

	Depart A	B
Cost allocated to departments ont he basis of machine hours	$270,000[$50*5,400]	$1,080,000[$50*21,600 Machine hours]

Second stage allocation to products -direct labor hours

	Depart A	B
Cost allocated	$270,000[$50*5,400]	$1,080,000[$50*21,600 Machine hours]
Direct labor hours	27,000	13,500
Pre determined OH rate per direct labor hour	$10 perDirect Labor Hour [270,000/27,000]	$80 per Direct Labor Hour [$1,080,000/13,500]

Now, we will allocate overhead cost to products

	deluxe	Regular
Material	$135	$67.5
Labor hour	$75[3 labor hours*$25]	$81[3 direct labor hour*$27]
Overhead :
Department A	$20[$10 per *2]	$20[$10 per *2]
Department B	$80[$80*1]	$80[$80*1]
Unit product cost	$310[$135+75+20+80]	$248.5[$67.5+81+20+80]

2.ABC Overhead costing uses different cost drivers to allocate cost

	Budgeted		Budgeted	overhead per unit of the cost driver
Activity	Overhead	Cost Driver	Quantity
Material movement	9,450	Number of production runs	403.00	$23.45[$9,450/403]
Machine setups	540,000	Number of setups	675	$800 per set up[$540,000/675]
Inspections	793,800	Number of units	26,460	$30 per unit[$793,800/26,460]
Shipment	6,750	Number of shipments	338.00	$19.97 per shipment[$6,750/338]

now, we will allocate cost

		overhead per unit of the cost driver	Deluxe	Regular
Activity	Cost Driver
Material movement	Number of production runs	$23.5[$9,450/403]	$470[$23.5*20]	$634.5[$23.5*27]
Machine setups	Number of setups	$800 per set up[$540,000/675]	$27,200[$800*34]	$54,400[$800*68]
Inspections	Number of units	$30 per unit[$793,800/26,460]	$8,100[$30*270]	$32,400[$30*1,080]
Shipment	Number of shipments	$20 per shipment[$6,750/338]	$1,360[$20*68]	$2,700[$20*135]
		Total overhead cost allocated	$37,130	$90,134.5
		Number of units	270	1,080
		Per unit cost	$137.5	$83.5

	deluxe	Regular
Material	$135	$67.5
Labor hour	$75[3 labor hours*$25]	$81[3 direct labor hour*$27]
Overhead :	$137.5	$83.5
Unit product cost	$347.50[$135+75+137.5]	$232[$67.5+81+83.5]

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