Question

In: Accounting

Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments....

Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A's production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data has been gathered for the two products:

Product Data
Model A Model B
Units produced per year 10,000 100,000
Prime costs $150,000 $1,500,000
Direct labor hours 140,000 300,000
Machine hours 20,000 200,000
Production runs 40 60
Inspection hours 800 1,200
Maintenance hours 10,000 90,000
Overhead costs:
Setup costs $270,000
Inspection costs 210,000
Machining 240,000
Maintenance 270,000
Total $990,000
Required:
1. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Round to two decimal places.)
2. Compute the overhead cost per unit for each product by using ABC. (Round rates and unit overhead cost to two decimal places.)
3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine intensive) with a rate of $3.50 per machine hour and Department 2 (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:

Department 1

Department 2

Machine Hours

Direct Labor Hours

Model A 10,000 130,000
Model B 170,000 270,000
Compute the overhead cost per unit for each product by using departmental rates. (Round to two decimal places.)
4.

CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Round to two decimal places.)

Plantwide rate:  per DLH.

Model A:  overhead cost per unit.
Model B:  overhead cost per unit.

2. Compute the overhead cost per unit for each product by using ABC. (Round rates and unit overhead costs to two decimal places.)

Model A:  overhead cost per unit.
Model B:  overhead cost per unit.

Note: Be sure to complete both tables below.

Activity Driver Activity Rate
Setups Production runs per run
Inspections Inspection hours per hour
Machining Machine hours per hour
Maintenance Maintenance hours per hour

3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1: (machine intensive) with a rate of $3.50 per machine hour and Department 2: (labor intensive) with a rate of $0.90 per direct labor hour. The consumption of these two drivers is as follows:

Department 1

Department 2

Machine Hours

Direct Labor Hours

Model A 10,000 130,000
Model B 170,000 270,000

Compute the overhead cost per unit for each product by using departmental rates. (Round to two decimal places.)

Model A:  per unit
Model B:  per unit
Overhead assignment
Model A Model B
Setups
Inspections
Machining
Maintenance
Total overhead
÷ Units produced
Overhead per unit

4. CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

A common justification is to use     hours for machine-intensive departments and     hours for labor-intensive departments. Using activity-based costs as the standard, we can say that departmental rates     the accuracy of the overhead cost assignment for both products. The departmental rates cost A well     the ABC method while the plantwide rate costs A well     the ABC method. However, the rates of difference are very close. Looking at it this way, departments costs are not clearly more wrong than the plantwide rate; they are wrong in a     direction.

Solutions

Expert Solution

DETAILS PROVIDED IN QUESTION:

COST DATA OF MODEL A & B IS GIVEN. ABC DETAILS ARE GIVEN FOR OVERHEADS CALCULATION.

CALCULATE COST AS PER TRADITIONAL METHOD OF OVERHEAD ABSORBTION & ABC.

ANSWER:

1. OVERHEAD COST PER UNIT AS PER TRADITIONAL METHOD - DIRECT LABOR HOUR BASIS

OVERHEAD COSTS

$

SET UP COSTS

               270,000

INSPECTION COSTS

               210,000

MACHINING

               240,000

MAINTENANCE

               270,000

TOTAL

               990,000

TOTAL LABOR HOURS

MODEL A

               140,000

MODEL B

               300,000

TOTAL

               440,000

OVERHEAD ABSORPTION RATE

(= $ 990,000 / 440,000 HOURS )

$ 2.25

PER LABOR HOUR

OVERHEAD COST PER UNIT

MODEL A

MODEL B

OVERHEADS @ $ 2.25 PER LABOR HOUR (A)

               315,000

                    675,000

(140,000 X 2.25)

(300,000 X 2.25)

UNITS (B)

                 10,000

                    100,000

OVERHEAD COST PER UNIT (A / B)

$ 31.50

$ 6.75

2. OVERHEAD COST PER UNIT AS PER ABC

TO FIND COST DRIVER RATES

ACTIVITY

OVERHEAD

COST DRIVER

TOTAL COST DRIVER

DRIVER RATE

SET UP COSTS

               270,000

PRODUCTION RUNS

40 + 60 = 100 RUNS

$ 2,700.00

PER RUN

INSPECTION COSTS

               210,000

INSPECTION HOURS

800 + 1200 = 2000 HOURS

$ 105.00

PER HOUR

MACHINING

               240,000

MACHINE HOURS

20,000+200,000 = 220,000

$ 1.09

PER HOUR

MAINTENANCE

               270,000

MAINTENANCE HOURS

10,000 + 90,000 = 100,000

$ 2.70

PER HOUR

TOTAL

              $ 990,000

ALLOCATION OF OVERHEADS BETWEEN MODEL A & B

MODEL A

MODEL B

SET UP COSTS @ $ 2700 PER RUN

               108,000

                         162,000

( 40 X 2700)

(60 X 2700)

INSPECTION COSTS @ $ 105 PER HOUR

                 84,000

                         126,000

(105 X 800)

(105 X 1200)

MACHINING @ $ 1.09 PER HOUR

                 21,800

                         218,000

( 1.09 X 20000)

(1.09 X 200000)

MAINTENANCE @ $ 2.70 PER HOUR

                 27,000

                         243,000

(2.70 X 10,000)

(2.70 X 90,000)

TOTAL

               240,800

                        749,000

UNITS

                 10,000

                         100,000

OVERHEAD COST PER UNIT

                  $ 24.08

                              $ 7.49

3. OVERHEAD COST PER UNIT USING DEPARTMENTAL RATES:

MODEL A

MODEL B

DEPARTMENT 1 @ $ 3.50 PER HOUR

$ 35,000

$ 595,000

(10,000 X 3.50)

(170,000 X 3.50)

DEPARTMENT 2 @ $ 0.90 PER HOUR

$ 117,000

$ 243,000

(130,000 X 0.90)

( 270,000 X 0.90)

TOTAL

$ 152,000

$ 838,000

UNITS

10,000

100,000

OVERHEAD COST PER UNIT

$ 15.20

$ 8.38

4. CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

METHOD OF OVERHEADS

MODEL A

MODEL B

OVERHEAD COST PER UNIT AS PER ABC

                   24.08

                                7.49

OVERHEAD COST PER UNIT AS PER DEPARTMENTAL RATES

                   15.20

                                8.38

OVERHEAD COST PER UNIT AS PER PLANTWIDE RATES

                   31.50

                                6.75

ABC METHOD IS CONSIDERED MORE RELIABLE THAN DEPARTMENTAL & PLANTWIDE RATES.

MODEL A IS UNDER CHARGED AND MODEL B IS OVER CHARGED AS PER DEPARTMENTAL RATES

COMPARED TO ABC. HENCE, THERE IS SCOPE FOR IMPROVEMENT

DEPARTMENTAL RATES HAVE NOT DONE BETTER THAN PLANTWIDE RATES AS THE DIFFERENCE

BETWEEN ABC & DEPARTMENTAL RATES IS MORE THAN DIFFERENCE BETWEEN ABC &

PLANTWIDE RATES


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