Question

Billy Corp allocated the following amounts of manufacturing overhead to Products A & B using only direct labor hours as a driver:

Product A 168,000

Product B 112,000

Billy has decided to switch to ABC for the allocation of manufacturing overhead. Billy will still use direct labor hours as a driver for $120,000 of overhead. The remaining overhead will be allocated using machine hours. Product A uses 2,000 machine hours and Product B uses 6,000 machine hours.

a) How much additional overhead is allocated to Product B after switching to ABC?

b) Refer to above. How much overhead is allocated to Product A in the machine hours pool?

c)Tammy Corp has the following data:

Variable Cost/Unit = $48

Variable Cost % = 80%

Fixed Cost = $96,000

Tax Rate = 30%

How many units must Tammy sell to make an after-tax profit = $40,320?

d) Refer to above. What is the total variable cost when Tammy makes an after-tax profit = $117,600?

Answer 1

Solution-

Part a. - additional overhead allocated to product B under ABC costing method

Total Overhead = ($168000 + $112000) = $280000

Overhead to be allocated as per direct labour hour = $120000

Overhead to be allocated as per machine Hours = $160000

Total Machine Hours = (2000 + 6000) = 8000 hours

Predetermined Overhead rate =

(Estimated overhead)/Estimated Allocation base i.e. Machine Hours

Predetermined overhead rate = ($160000/8000) = $20 Per machine Hours

Overhead Allocation to Product B under ABC costing

Particulars	Amount
Overhead allocated (Direct labour hours) ($112000/$280000)*$120000	$48000
Overhead allocated (Machine Hours) ($20 per machine hour * 6000 machine hours	$120000
Total Overhead Allocated	$168000

Additional Overhead allocated to product B under ABC system

Particulars	Amount
Total Overhead alloctated under Traditional costing system	$112000
Total Overhead allocated under ABC system	$168000
Additional overhead allocated under ABC system ($168000 - $112000)	$56000

Part b. Overhead allocated to Product A under machine hour pool

Formula = Predetermined Overhead rate * Total Machine of product A

Overhead allocated to product A =

($20 Per machine hour * 2000 machine hour) = $40000

Part c. Calculation of units to be sold to make after tax profit of $40320

We take reversal approach to solve the question

Particulars	Amount
Net Income (After Tax) (70%) (Since tax is 30%)	$40320
Add : Tax expenses (30%) ($40320/70)*30	$17280
Before tax net Income (100%)	$57600
Add : Fixed Cost	$96000
Contribution Margin (20%) (A) (since variable cost part is 80%)	$153600
Variable cost (80%) (B) ($153600/20)*80	$614400
Total Sales (100%) (A+B)	$768000

Total Units to be sold = Total Sales/Sales price per unit

Total Units to be sold = ($768000/$48) = 16000 unite

Part d. Total Variable cost when after tax profit is $117600

Particulars	Amount
After Tax Profit (70%) (since Tax is 30%)	$117600
Add : taxes expenses (30%) ($117600/70)*30	$50400
Net income Before tax (100%)	$168000
add : Fixed cost	$96000
Contribution Margin (20%) (Since variable cost part is 80%)	$264000
Variable cost (80%) ($264000/20)*80	$1056000