Question

As you learned in the previous chapters, Current Designs has two main product lines—composite kayaks, which are handmade and very labor-intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Designs’ controller, Diane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company’s products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits.

Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead.

ActivitiesCost

Designing new models$116,000

Creating and testing prototypes152,000

Creating molds for kayaks180,000

Operating oven for the rotomolded kayaks40,000

Operating the vacuum line for the composite kayaks30,000

Supervising production employees192,000

Curing time (the time that is needed for the chemical
processes to finish before the next step in the
production process; many of these costs are related
to the space required in the building)216,000

Total$926,000

As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating the vacuum line for the composite kayaks can be directly assigned to each of these product lines and do not need to be assigned with the other costs.

For purposes of this analysis, assume that Current Designs uses $224,000 in direct labor costs to produce 1,000 composite kayaks and $311,000 in direct labor costs to produce 4,000 rotomolded kayaks each year.

One method of assigning overhead would assign the common costs to each product line by using an assignment basis such as the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak. Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the rotomolded kayak line, and the amount to be assigned to each of the units in each line. (Round cost assigned per unit to 2 decimal places, e.g. 125.25.)

CompositeRotomolded

Total cost assigned$ $

Cost assigned per unit$ $

eTextbook and Media

  

  

Another method of assigning overhead is to use direct labor dollars as an assignment basis. Remembering that the costs of the oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product line using this method. (Round cost assigned per unit to 2 decimal places, e.g. 125.25.)

CompositeRotomolded

Total cost assigned$ $

Cost assigned per unit$ $

eTextbook and Media

  

  

Activity-based costing requires a cost driver for each cost pool. Use the following information to assign the costs to the product lines using the activity-based costing approach.

Activity Cost PoolsCost DriversDriver Amount
for Composite
KayaksDriver Amount
for Rotomolded
Kayaks

Designing new modelsNumber of models31

Creating and testing prototypesNumber of prototypes62

Creating molds for kayaksNumber of molds111

Supervising production employeesNumber of employees1311

Curing timeNumber of days of curing time16,0002,000

What amount of overhead should be assigned to each composite kayak using this method? What amount of overhead should be assigned to each rotomolded kayak using this method? (Round cost assigned per unit to 2 decimal places, e.g. 125.25.)

CompositeRotomolded

Total cost assigned$ $

Cost assigned per unit$ $

eTextbook and Media

Answer 1

1)
Particular	Composite	Rotomolded
Directly assigned	30000	40000
Remaining amount allocated 50%	428000	428000
to each product line
Total cost assigned ($)	458000	468000
Number of units	1000	4000
Cost assigned per unit ($)	458	117

Working :

Remaining = 428000

50% * ( 926000 - 30000 - 40000 )

2)

Total OH costs (a)		856000
Direct labor cost (b)
Composite	224000
Rotomolded	311000	535000
OH rate ( a / b )		1.6

Particular	Composite	Rotomolded
Directly assigned	30000	40000
Remaining amount allocated	358400	497600
Based on direct labor costs
Total cost assigned ($)	388400	537600
Number of units	1000	4000
Cost assigned per unit ($)	388.4	134.4
Remaining
Composite = 1.6* 224000 = 358400
Rotomolded = 1.6 * 311000 = 497600

3)

		Estimated use of	Activity based
Acitivty Cost Pools	Estimated O/H	cost drivers	O/H rates
Design	116000	4	29000	per model
Prototypes	152000	8	19000	per prototype
Molds	180000	12	15000	per mold
Supervision	192000	24	8000	per employee
Curing time	216000	18000	12	per day

		Composite			Rotomolded
Acitivty Cost Pools	Drivers	rate	Assigned	Drivers	rate	Assigned
Design	3	29000	87000	1	29000	29000
Prototypes	6	19000	114000	2	19000	38000
Molds	11	15000	165000	1	15000	15000
Supervision	13	8000	104000	11	8000	88000
Curing time	16000	12	192000	2000	12	24000
Total Amount Allocated			662000			194000
Directly Assigned			30000			40000
Total Cost Assigned (a)			692000			234000
Number of units (b)			1000			4000
Cost assigned per unit ( a / b)			692			58.5