Question

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.

Answer 1

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