Question

Question 1: Perdon Corporation manufactures safes—large mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead.

		Mobile Safes		Walk-in Safes
Units planned for production		200		42
Material moves per product line		290		220
Purchase orders per product line		450		360
Direct labor hours per product line		810		1,710

The total estimated manufacturing overhead was $273,000. Under traditional costing (which assigns overhead on the basis of direct labor hours), what amount of manufacturing overhead costs are assigned to. (Round answers to 2 decimal places, e.g. 12.25)

(1) One mobile safe $____ per unit

(2) One walk-in safe $____ per unit

The total estimated manufacturing overhead of $273,000 was comprised of $163,000 for materials handling costs and $110,000 for purchasing activity costs. Under activity-based costing (ABC): (Round answer to 2 decimal places, e.g. 12.25.)

What amount of materials handling costs are assigned to:

(a) One mobile safe $____ per unit

(b) One walk-in safe $____ per unit

The total estimated manufacturing overhead of $273,000 was comprised of $163,000 for materials handling costs and $110,000 purchasing activity costs. Under activity-based costing (ABC):

What amount of purchasing activity costs are assigned to:

(a) One mobile safe $ ____ per unit

(b) One walk-in safe $ ____ per unit

Compare the amount of overhead allocated to one mobile safe and to one walk-in safe under the traditional costing approach versus under ABC. (Round answer to 2 decimal places, e.g. 12.25.)

	Traditional Costing	Activity-Based Costing
Mobile safe	$____	$____
Walk-in safe	$____	$____

Answer 1

1.traditional costing uses single overhead rate for allocating cost to products

direct labor hours

predetermined OH rate = total cost/ direct labor hours

=$273,000 /(810+1,710)

=$273,000/2,520

=$108.33 per direct labor hour

(1) One mobile safe $87,750 per unit (Direct labor hours*Pre determined OH rate)

=810*$108.33

=$87,747.3

(2) One walk-in safe $185,250 per unit

=1,710*$108.33

=$185,244.3

What amount of materials handling costs are assigned to:

Material handling cost will be allocated on the basis of material moves

=$163,000 / (290+220)

=$319.61

	OH rate	Activity	cost allocated
mobile safes	$319.61	290	$92,686.9[290*$319.61]
walk safes	$319.61	220	$70,314.2
Total			$163,000

What amount of purchasing activity costs are assigned to:

Purchasing activity cost will be allocated on the basis of purchase orders

=$110,000 / (450+360)

=$110,000/810

=$135.80

	OH rate	Activity	cost allocated
mobile safes	$$135.802469	450	$61,110[450*$135.80]
walk safes	$135.802469	360	$48,888 [360*$135.80]
Total			$110,000

	Traditional Costing	Activity-Based Costing
Mobile safe	$87,747.3	$153,796.9[$61,110+$92,686.90](material handling cost+purchasing activity cost)
Walk-in safe	$185,244.30	$119,201.73[$70,313.73+$48,888]

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