Question

This question has three parts:

1A

M. Company allocates overhead based on direct labor hours. It allocates overhead costs of $14,400 to two different jobs as follows:
Job 1: (12 hours) = $7,200; Job 2: (12 hours) = $7,200
The production process for Job 2 was then automated. Now Job 2 requires only 3 hours of direct labor but 4 hours of mechanical processing. As a result, total overhead increases to $19,500. With the change in the production process for Job 2, the amount of overhead assigned to:

A. each product will increase

B. job 1 will decrease

C. each product will decrease

D. job 1 will increase

1B

M. Company's competition allocates overhead based on direct labor hours. It allocates overhead costs of $16,800 to two different jobs as follows:
Job 1: (12 hours) = $8,400; Job 2: (12 hours) = $8,400
The production process for Job 2 was then automated. Now Job 2 requires only 3 hours of direct labor but 5 hours of mechanical processing. As a result, total overhead increases to $21,300. Select the incorrect statement from the following.

A. While the actual processing of Job 1 was not affected by automation, it received an increase of 8,640 in its overhead allocation.

B. The use of machine hours as the allocation base would significantly improve the overhead cost allocation.

C. Automation and the costing system used by the company cause the cost of Job 1 to be significantly overstated.

D. The increase overhead costs associated with automation should be allocated to both jobs.

1C

M. Company makes wicker and wooden slat picnic baskets. It requires approximately one hour of labor to make one basket of either type. Wicker baskets are produced in batches of 100 units and require 0.6 machine hours per basket. Wooden slat baskets are produced in batches of 50 units and require 0.75 machine hours per basket. Setup is required for each batch. During the most recent accounting period, the company made 9,500 wicker baskets and 3,500 wooden slat baskets. Setup costs amounted to $26,400 for the baskets produced during the period. If activity-based costing is used to allocate overhead costs to the two products, the amount of setup cost assigned to the wicker baskets will be:

A. $17,730

B. $20,610

C. $15,840

D. $15,200

Answer 1

Ans:

a.

As the assigned cost to Job 1 will increase because now direct labor hours will reduce to 15 and job 1 will be allocated for 12 labor hours. So cost assigned to job 1 will increase. Also total overheads increase to $19,500. Total cost allocated to job 2 will be  ($19500-$14,400) + $14,400*3/15= $7,980

So the correct answer will be:

A. each product will increase

b.

As only job 2 is automated cost associated with automation should be allocated to job 2 only. So incorrect statement would be:

D. The increase overhead costs associated with automation should be allocated to both jobs.

C.

In case of activity based costing total setup cost will be allocated on the basis on number of setups required for each type of basket production:

For wicker Baskets total unit produced: 9,500

Number of batch used : 9500/100= 95

For wooden Baskets total unit produced: 3,500

Number of batch used : 3500/50= 70

Setup Costs: $26,400

Setup costs for wicker basket: 26,400*95/165= $15,200.

Correct option is :

D. $15,200