In: Accounting
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 | $ | $ | $ |
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...