Question

British Hairways designs three types of hairdryers: X, Y, and Z. British Hairways recently undertook a cost study and determined that there were six main factors causing costs to be incurred. As a result, they designed a new system with a separate cost pool for each factor. The factor, cost driver, and total cost pools are as follows:

Factor	Cost Driver	Total Cost Pool
Factory worker wages	Direct labour hours	$1,391,600
Depreciation on machines	Machine hours	$936,000
Materials handling and storage costs	Kilograms of materials	$129,600
Labour used to change machinery in preparation of a new batch	Number of setups	$160,000
Costs of order processing	Number of batches	$25,650
Shipping expenses	Number of orders shipped	$114,000

The company is now preparing a budget for next year. The following predictions have been made:

	Product X	Product Y	Product Z
Units to be Produced	10,000	800	5,000
Direct Material Costs	$66/unit	$88/unit	$45/unit
Direct Labour Hours	4 hours/unit	18 hours/unit	9 hours/unit
Machine Hours	7 hours/unit	15 hours/unit	7 hours/unit
Kilograms of Materials	3 kg / unit	4 kg / unit	2 kg / unit
Number of setups	100	50	50
Number of batches	300	200	70
Number of orders shipped	1,000	800	2,000

Required. Complete the following grid with the new costing data for the following cost pools. Do not use $ signs in your final answer.

	Product X	Product Y	Product Z
Factory worker wages	$	$	$
Depreciation on machines	$	$	$
Shipping expenses	$	$	$

Answer 1

STEP 1: ACTIVITY RATE

(i) FACTORY WORKER WAGES

Overhead cost = $1,391,600

Product	Computation	Direct Labor Hours
X	10,000 units * 4 hours/unit	40,000
Y	800 units * 18 hours/unit	14,400
Z	5,000 units * 9 hours/unit	45,000
	Total direct labor hours	99,400

Factory worker wages activity rate = $1,391,600 / 99,400 direct labor hours = $14 per direct labor hour

(ii) DEPRECIATION ON MACHINE

Overhead cost = $936,000

Product	Computation	Direct Labor Hours
X	10,000 units * 7 hours/unit	70,000
Y	800 units * 15 hours/unit	12,000
Z	5,000 units * 7 hours/unit	35,000
	Total direct labor hours	117,000

Depreciation on machine activity rate = $936,000 / 117,000 machine hours = $8 per machine hour

(iii) SHIPPING EXPENSES

Overhead cost = $114,000

Product	Number of orders shipped
X	1,000
Y	800
Z	2,000
Total	3,800

Shipping expenses activity rate = $114,000 / 3,800 machine hours = $30 per order shipped

STEP 2: COSTING DATA

Particulars	Product X	Product Y	Product Z
Factory worker wages	$560,000	$201,600	$630,000
Depreciation on machines	$560,000	$96,000	$280,000
Shipping Expenses	$30,000	$24,000	$60,000

Working notes

Factory Worker wages

Product X = 40,000 direct labor hours * $14 = $560,000

Product Y = 14,400 direct labor hours * $14 = $201,600

Product Z = 45,000 direct labor hours * $14 = $630,000

Depreciation on machines

Product X = 70,000 machine hours * $8 = $560,000

Product Y = 12,000 machine hours * $8 = $96,000

Product Z = 35,000 machine hours * $8 = $280,000

Shipping Expenses

Product X = 1,000 orders shipped * $30 = $30,000

Product Y = 800 orders shipped * $30 = $24,000

Product Z = 2,000 orders shipped * $30 = $60,000

All the best...