Question

Stuart Electronics produces video games in three market categories: commercial, home, and miniature. Stuart has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	627,800		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			520,000		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			210,100		Research and development	Time spent by research department
Facility			514,100		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

     
Additional data for each of the product lines follow:     

	Commercial				Home				Miniature				Total
Direct materials cost	$	36.70	/unit		$	23.50	/unit		$	29.70	/unit			—
Direct labor cost	$	14.10	/hour		$	14.10	/hour		$	17.90	/hour			—
Number of labor hours		5,200				12,000				2,300				19,500
Number of machine hours		11,000				40,000				22,000				73,000
Number of production orders		240				2,200				60				2,500
Research and development time		12	%			19	%			69	%			100	%
Number of units		11,000				46,000				10,000				67,000
Square footage		21,000				47,000				29,000				97,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

	Type of Product Total Cost Cost per Unit a. Commercial Home Miniature Combined total b. Commercial Home Miniature Combined total $0

Answer 1

Predetermined Overhead Rate = (627800+520000+210100+514100) (total Overhead) / 19500 DLH

( 1872000/19500 DLH

Predetermined Overhead Rate = $96 per DLH

Overhead Assigned	Activity Driver ( in LabourHour) (A)	Plantwide OH Rate (B)	Total Overhead Cost (c=AXB)	Units Produced (D)	OH Cost per Unit (C/D)
Commercial	5200	$96.00	$499,200.00	11000	$45.38
Home	12000	$96.00	$1,152,000.00	46000	$25.04
Miniature	2300	$96.00	$220,800.00	10000	$22.08

a. Computation of total Product Cost and Unit cost
As per Compwide Allocation Base
	Commercial	Home	Miniature
Direct Material (36.70*11000)(23.50*46000) (29.70*10000)	$403,700.00	$1,081,000.00	297000
Direct Labor	$73,320.00	$169,200.00	$41,170.00
	(5200*14.10)	(12000*14.10)	(2300*17.90)
Applied Overhead	$499,200.00	$1,152,000.00	$220,800.00
Total Cost (a)	$976,220.00	$2,402,200.00	$558,970.00
No. of Unit (b)	11000	46000	10000
Cost per Unit (a/b)	$88.75	$52.22	$55.90

Working Note
ABC Costing
Activity	Overhead (A)	Cost Driver Quantity (B)		Allocation Rate A/B)
Indirect Labour, Wages , Suplies	$627,800.00	73000	Machine Hour	$8.60	Machine Hour
Material Handling , invenry srage	$520,000.00	2500	No. of Production order	$208.00	No. of Production order
Research & Dev Cost	$210,100.00	100%	Time spent by R& D	$210,100.00	Time spent by R& D
Rent , General Utilities	$514,100.00	97000	SQ Footage	$5.30	SQ Footage
tal	$1,872,000.00

Assigning Overhead Cost Product Model
Using ABC Method
			Commercial	Home	Miniature
	Activity Based Overhead Rate (A)	Driver	Cost Driver Incurred (B)	OH Allocated (AXB)	Cost Driver Incurred ( C)	OH Allocated (AXC)	Cost Driver Incurred ( C)	OH Allocated (AXC)
Indirect Labour, Wages , Suplies	$8.60	Machine Hour	11000	$94,600.00	40000	$344,000.00	22000	$189,200.00
Material Handling , invenry srage	$208.00	No. of Production order	240	$49,920.00	2200	$457,600.00	60	$12,480.00
Research & Dev Cost	$210,100.00	Time spent by R& D	12%	$25,212.00	19%	$39,919.00	69%	$144,969.00
Rent , General Utilities	$5.30	SQ Footage	21000	$111,300.00	47000	$249,100.00	29000	$153,700.00
tal Overhead (i)				$281,032.00		$1,090,619.00		$500,349.00
No. Of Units (ii)				11000		46000		10000
Overhead per Unit (i/ii)				$25.55		$23.71		$50.03

2. Calculation of Unit Product Cost
Under ABC Costing
	Commercial	Home	Miniature
Direct Material (36.70*11000)(23.50*46000) (29.70*10000)	$403,700.00	$1,081,000.00	297000
Direct Labor	$73,320.00	$169,200.00	$41,170.00
	(5200*14.10)	(12000*14.10)	(2300*17.90)
Applied Overhead	$281,032.00	$1,090,619.00	$500,349.00
Total Cost (a)	$758,052.00	$2,340,819.00	$838,519.00
No. of Unit (b)	11000	46000	10000
Cost per Unit (a/b)	$68.91	$50.89	$83.85