Question

Sunland is an electronics components manufacturer. Information about the company’s two products follows: AM-2 FM-9 Units produced 25,000 5,000 Direct labor hours required for production 12,500 15,000 Units per batch 5,000 500 Shipping weight per unit 0.50 lbs. 10 lbs. The company incurs $899,250 in overhead per year and has traditionally applied overhead on the basis of direct labor hours. Assume that Sunland has identified three activity cost pools. Pool Cost Cost Driver Assembly $577,500 Direct labor hours Setup 40,500 Number of setups (1 per batch) Packaging 281,250 Weight

(i) Given these activity pools and cost drivers, how much overhead should be allocated to each product? AM-2 FM-9

(ii) What overhead cost per unit will be allocated to each product?

Answer 1

Just for the gathering of information

AM-2 FM-9

Units produced 25,000 5,000

Direct labor hours required for production 12,500 15,000

Units per batch 5,000 500

Shipping weight per unit 0.50 lbs 10 lbs

Pool Cost Cost Driver

Assembly $577,500 Direct labor hours

Setup 40,500 Number of setups (1 per batch)

Packaging 281,250 Weight

i) Allocation of overheads on the basis of activity drivers.

Assembly:

AM-2 : Total Assembly cost / total direct labor hours * direct labor hours for AM-2

= [$577,500 / (12,500 + 15,000)] * 12,500 hours

= $577,500 / 27,500 * 12,500

= $262,500

FM-9 : Total Assembly cost / total direct labor hours * direct labor hours for FM-9

= [$577,500 / (12,500 + 15,000)] * 15,000 hours

= $577,500 / 27,500 * 15,000

= $315,000

Set up :

AM-2 : Total set up cost / total batches * batches of AM-2

= $40,500 / (5+10) * 5

= $40,500 / 15 * 5

= $13,500

FM-9 : Total set up cost / total batches * batches of FM-9

= $40,500 / (5+10) * 10

= $40,500 / 15 * 10

= $27,000

Calculation of number of batches:

Number of batch = Total units to be produced / Number of units per batch

AM-2 = 25,000 units / 5,000 units per batch = 5 batches

FM-9 = 5,000 units / 500 units per batch = 10 batches

Packaging cost:

AM-2 : Total packaging cost / total weight * weight of AM-2

= $281,250 / (12,500 + 50,000) * 12,500

= $281,250 / 62,500 * 12,500

= $56,250

FM-9 : Total packaging cost / total weight * weight of FM-9

= $281,250 / (12,500 + 50,000) * 50,000

= $281,250 / 62,500 * 50,000

= $225,000

Calculation of weights:

Weight = Total units * weight per unit

AM-2 = 25,000 units * 0.50 lbs per unit = 12,500 lbs

FM-9 = 5,000 units * 10 lbs per unit = 50,000 lbs

Therefore overhead allocated to AM-2 = $262,500 + $13,500 + $56,250 = $332,250

Therefore overhead allocated to FM-9 = $315,000 + $27,000 + $225,000 = $567,000

ii)

Calculation of overhead cost per unit : Total overhead cost / number of units

AM-2 = $332,250 / 25,000 units = $13.29 per unit

FM-9 = $567,000 / 5,000 units = $113.4 per unit