Question

Waterway is an electronics components manufacturer. Information about the company’s two products follows:

		AM-2		FM-9
Units produced		20,000		4,000
Direct labor hours required for production		10,000		15,000
Units per batch		4,000		400
Shipping weight per unit		0.50	lbs.	10	lbs.

The company incurs $814,000 in overhead per year and has traditionally applied overhead on the basis of direct labor hours.

(a)

Correct answer iconYour answer is correct.

(i)	How much overhead will be allocated to each product using the traditional direct labor hours allocation base? (Round per unit rates to 2 decimal places, e.g. 3.54 and final answers to 0 decimal places, e.g. 45,000.)

		AM-2	FM-9
Overhead allocated to each product		$enter a dollar amount rounded to 0 decimal places	$enter a dollar amount rounded to 0 decimal places

(ii)	What overhead cost per unit will be allocated to each product? (Round answers to 2 decimal places, e.g. 15.25.)

		AM-2	FM-9
Overhead cost per unit		$enter a dollar amount rounded to 2 decimal places	$enter a dollar amount rounded to 2 decimal places

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Attempts: 1 of 3 used

(b)

Assume that Waterway has identified three activity cost pools.

Pool		Cost		Cost Driver
Assembly		$575,000		Direct labor hours
Setup		39,000		Number of setups (1 per batch)
Packaging		200,000		Weight

(i)	Given these activity pools and cost drivers, how much overhead should be allocated to each product? (Round per unit rates to 2 decimal places, e.g. 3.54 and final answers to 0 decimal places, e.g. 45,000.)

		AM-2		FM-9
Total allocated overhead		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

(ii)	What overhead cost per unit will be allocated to each product? (Round answers to 2 decimal places, e.g. 15.25.)

		AM-2		FM-9
Overhead cost per unit		$enter a dollar amount rounded to 2 decimal places		$enter a dollar amount rounded to 2 decimal places

Answer 1

A)

(1)

Estimated overhead cost = $814000

Total direct labour hours = direct labour hoursof Am2 + direct labour hours of fm9 = 10000 hours + 15000 hours = 25000 hours

As the allocation base is direct labour hours the activity level is 25000 direct labour hours

Activity rate = Estimated Overhead cost/Expected activity level = $814000/25000 hours = $32.56 per direct labour hour

So,

• Overhead allocated to Product Am2 = Labour hours of AM2*Activity rate = 10000 hours*$32.56= $325600

• Overhead allocated to product FM9 = labour hours of FM9* activity rate = 15000 hours*$32.56= $488400

(2)

Units produced of

AM2 =20000 Units

FM9 =4000 Units

• Overhead cost per unit of Product AM2 = Total overhead allocated to AM2/Total units of product AM2= $325600/20000 units = $16.28 per unit of product AM2

• Overhead cost per unit of product FM9= Total overhead allocated to FM9/Total units of product FM9 = $488400/4000 units = $122.10 per unit of product FM9

B)

(1)

  

Total direct labour hours = 25000 hours

Total no of batches= no of batches of product AM2 + no of batches of product FM9 =(Total units of AM2/no of units per batch)+(Total units of FM9/ no of units per batch) = (20000 units/4000 per batch)+(4000 units/ 400 per batch) = 15 batches

No of batches of product AM2 = 5 batches

No of batches of product FM9 = 10 batches

Total weight = (Total units of Am2*weight per unit)+(Total units of FM9*weight per unit)=(20000 units* 0.50 lbs)+(4000 units* 10 lbs)= 50000 lbs

Total weight of Product AM2=10000 lbs

Total weight of product FM9=40000 lbs

Cost driver for Overhead cost of assembly is direct labour hours

So,

• Activity rate of assembly = Overhead cost of assembly/ activity level = $575000/25000 hours = $23 per direct labour hours

• Cost driver for Setup is number of setups(1 per batch)
• Activity rate of setup = Overhead cost of setup/ Activity level = $39000/15 batches = $2600 per batch

• Cost driver for packaging is weight
• Activity rate of packaging = Overhead cost of packaging/ Activity level = $200000/50000 lbs = $4 per lbs

• Allocation of overhead to Product AM2=(Direct labour hours of AM2*Activity rate of assembly)+(No of batches of product AM2 *Activity rate of setup)+(Total weight of Product AM2 *Activity rate of packaging) =(10000 hours*$23)+(5 batches*$2600)+(10000 lbs*$4) = $283000

• Allocation of overhead to product FM9 =(Direct labour hours of FM9*Activity rate of assembly)+(No of batches of product FM9 *Activity rate of setup)+(Total weight of product FM9 *Activity rate of packaging) = (15000 hours*$23)+(10 batches*$2600)+(40000 lbs*$4) = $531000

(2)

Overhead cost per unit of Product AM2 = Allocated overhead cost to AM2/ Total units of AM2= $283000/20000 Units = $14.15 per unit of product AM2

Overhead Cost per unit of Product FM9 = Allocated overhead cost to FM9/ Total units of FM9 = $531000/4000 Units = $132.75 per unit of product FM9