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	$148,000	$1,480,000
Direct labor hours	135,000	300,000
Machine hours	21,000	197,000
Production runs	40	50
Inspection hours	1,000	1,400
Maintenance hours	9,000	91,000
Overhead costs:
Setup costs	$252,000
Inspection costs	276,000
Machining	289,500
Maintenance	270,000
Total	$1,087,500	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 $3.40 per machine hour and Department 2 (labor intensive) with a rate of $1.00 per direct labor hour. The consumption of these two drivers is as follows: Department 1 Department 2 Machine Hours Direct Labor Hours Model A 10,000 135,000 Model B 190,000 260,000 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?

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.)

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

3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1: (machine intensive) with a rate of $3.40 per machine hour and Department 2: (labor intensive) with a rate of $1.00 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	135,000
Model B	190,000	260,000

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

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?

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.)

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

3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1: (machine intensive) with a rate of $3.40 per machine hour and Department 2: (labor intensive) with a rate of $1.00 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	135,000
Model B	190,000	260,000

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

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