Question

Perdon Corporation manufactures safes—large mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead.

		Mobile Safes		Walk-in Safes
Units planned for production		200		50
Material moves per product line		300		200
Purchase orders per product line		450		350
Direct labor hours per product line		800		1,700

The total estimated manufacturing overhead was $268,000. Under traditional costing (which assigns overhead on the basis of direct labor hours), what amount of manufacturing overhead costs are assigned to: (Round answers to 2 decimal places, e.g. 12.25.)

(1)		One mobile safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit
(2)		One walk-in safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit

The total estimated manufacturing overhead of $268,000 was comprised of $164,000 for materials handling costs and $104,000 for purchasing activity costs. Under activity-based costing (ABC): (Round answers to 2 decimal places, e.g. 12.25.)

What amount of materials handling costs are assigned to:

(a)		One mobile safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit
(b)		One walk-in safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit

The total estimated manufacturing overhead of $268,000 was comprised of $164,000 for materials handling costs and $104,000 for purchasing activity costs. Under activity-based costing (ABC): (Round answers to 2 decimal places, e.g. 12.25.)

What amount of purchasing activity costs are assigned to:

(a)		One mobile safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit
(b)		One walk-in safe		$enter a dollar amount per unit rounded to 2 decimal places	per unit

Compare the amount of overhead allocated to one mobile safe and to one walk-in safe under the traditional costing approach versus under ABC. (Round answers to 2 decimal places, e.g. 12.25.)

		Traditional Costing		Activity-Based Costing
Mobile safe		$enter a dollar amount rounded to 2 decimal places		$enter a dollar amount rounded to 2 decimal places
Walk-in safe		$enter a dollar amount rounded to 2 decimal places		$enter a dollar amount rounded to 2 decimal places

Answer 1

Part 1 Traditional costing system

Predetermined overhead rate = 268,000/ (800 + 1700) = $107.20 per direct labor hr

	Mobile safe	Walk in safe
Labor hrs	800	1700
Overhead allocated	85,760	182,240
Overhead allocated per unit	$428.80 (85,760/200 units)	$3,644.80 (182,240/ 50 units)

Part 2 ABC

Activity rate for material handling costs = 164,000/ (300 + 200) = $ 328

	Mobile safe	Walk in safe
Material moves per product line	300	200
Overhead allocated	98,400	65,600
Overhead allocated per unit	$492 (98,400/200 units)	$1,312 (65,600/ 50 units)

Part 3 ABC

Activity rate for purchasing activity costs = 104,000/ (450 + 350) = $130

	Mobile safe	Walk in safe
Purchase orders per product line	450	350
Overhead allocated	58,500	45,500
Overhead allocated per unit	$292.50 (58,500/200 units)	$910 (45,500/ 50 units)

Part 4

	Traditional costing	ABC Costing
Mobile safe	428.80	784.50 [492 + 292.50]
Walk in safe	3644.80	2,222 [1,312 + 910]