Question

Thornton Electronics produces video games in three market categories: commercial, home, and miniature. Thornton has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	678,600		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			639,500		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			210,500		Research and development	Time spent by research department
Facility			552,000		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

     
Additional data for each of the product lines follow:     

	Commercial				Home				Miniature				Total
Direct materials cost	$	36.50	/unit		$	23.70	/unit		$	30.40	/unit			—
Direct labor cost	$	14.80	/hour		$	14.80	/hour		$	18.10	/hour			—
Number of labor hours		5,800				12,800				2,000				20,600
Number of machine hours		13,000				47,000				18,000				78,000
Number of production orders		250				2,100				550				2,900
Research and development time		13	%			24	%			63	%			100	%
Number of units		18,000				42,000				17,000				77,000
Square footage		17,000				45,000				30,000				92,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

Answer 1

Answer 1.

Predetermined Overhead Rate = ($678600+639500+210500+552000) (tal Overhead) /20600 DLH

Predetermined Overhead Rate = $101 per DLH

Overhead Assigned	Activity Driver ( in LabourHour) (A)	Plantwide OH Rate (B)	tal Overhead Cost (c=AXB)	Units Produced (D)	OH Cost per Unit (C/D)
Commercial	5800	$101.00	$585,800.00	18000	$32.54
Home	12800	$101.00	$1,292,800.00	42000	$30.78
Miniature	2000	$101.00	$202,000.00	17000	$11.88

a. Calculation of Unit Product Cost
As per Compwide Allocation Base
	Commercial	Home	Miniature
Direct Material	$36.50	$23.70	30.4
Direct Labor ($14.80X 5800DLH)/ 18000, ($14.80X 12800 DLH)/42000, (18.10X2000)/17000	$4.77	$4.51	$2.13
Applied Overhead	$32.54	$30.78	$11.88
Product Cost per Unit	$73.81	$58.99	$44.41

Answer 3.
ABC Costing
Activity	Overhead (A)	Cost Driver Quantity (B)		Allocation Rate A/B)
Indirect Labour, Wages , Suplies	$678,600.00	78000	Machine Hour	$8.70	Machine Hour
Material Handling , invenry srage	$639,500.00	2900	No. of Production order	$220.52	No. of Production order
Research & Dev Cost	$210,500.00	100%	Time spent by R& D	$210,500.00	Time spent by R& D
Rent , General Utilities	$552,000.00	92000	SQ Footage	$6.00	SQ Footage
tal	$2,080,600.00

Assigning Overhead Cost Product Model
Using ABC Method
			Commercial	Home	Miniature
	Activity Based Overhead Rate (A)	Driver	Cost Driver Incurred (B)	OH Allocated (AXB)	Cost Driver Incurred ( C)	OH Allocated (AXC)	Cost Driver Incurred ( C)	OH Allocated (AXC)
Indirect Labour, Wages , Suplies	$8.70	Machine Hour	13000	$113,100.00	47000	$408,900.00	18000	$156,600.00
Material Handling , invenry srage	$220.52	No. of Production order	250	$55,129.31	2100	$463,086.21	550	$121,284.48
Research & Dev Cost	$210,500.00	Time spent by R& D	13%	$27,365.00	24%	$50,520.00	63%	$132,615.00
Rent , General Utilities	6	SQ Footage	17000	$102,000.00	45000	$270,000.00	30000	$180,000.00
tal Overhead (i)				$297,594.31		$1,192,506.21		$590,499.48
No. Of Units (ii)				18000		42000		17000
Overhead per Unit (i/ii)				$16.53		$28.39		$34.74

2. Calculation of Unit Product Cost
Under ABC Costing
	Commercial	Home	Miniature
Direct Material	$36.50	$23.70	30.4
Direct Labor ($14.80X 5800DLH)/ 18000, ($14.80X 12800 DLH)/42000, (18.10X2000)/17000	$4.77	$4.51	$2.13
Applied Overhead	$16.53	$28.39	$34.74
Product Cost per Unit	$57.80	$56.60	$67.26