Question

In: Accounting

1. Activity Based Costing Duncan Company recently introduced a markers to complement their other product, pencils....

1. Activity Based Costing

Duncan Company recently introduced a markers to complement their other product, pencils. Accountants accumulate all overhead in a single cost pool and allocate it based on machine-hours. With the recent addition of an expanded computer system, Duncan decided to begin implementing ABC. A study reveals much overhead cost related to machine setups and batch changes. They select the number of setups and the number of batch changes as the activity driers for the two new cost pools. They will continue to use machine-hours as the base for allocating all remaining overhead. Accountants provide the following information about Duncan Company’s most recent year of operations:

                                                                Pencils                      Markers                              Total

Units produced                                           5,000 1,000                            6,000

Direct material cost per unit               $            5 $      3                  

Direct labor cost                                    200,000 $300,000                     $500,000

Machine hours                                           4,000 6,000                          10,000

Machine setups                                               30 50                                 80

Batch changes                                               300 700                            1,000

Overhead:

            Machine setup-related                                                                                     $   200,000

            Batch-related                                                                                                        500,000

            Other                                                                                                               1,500,000

                                                                                                                                    $2,200,000

                                                                                                                                    ========   

Required:

Using the current costing system (Absorption costing), determine the total and unit cost for each product line.

Using the ABC costing system, determine the total and unit cost for each product line.

If you were the manager of the pencil department, which method would you prefer and why?

Product Costs using the Current Costing System

(Absorption Costing)

OHR =

                                 Pencils Markers Total

Direct Material       $                                              $ $

Direct Labor

Overhead                                         

(OHR x AV)

Total Cost            $ $ $

                                                                                      =======

÷Units produced                                          

Cost per unit

                             =======             =======            

Product Costs using the ABC Costing System

         OHR #1 = ____________ =                               

        

OHR #2 = ____________ =                               

        

OHR #3 = ____________ =                               

                                 Pencils              Markers               Total

Direct Material       $                                              $                                              $

Direct Labor

Overhead                                         

(OHR x AV)

                                                                                                  

Total Cost            $                           $                           $

                                                                                      

÷Units produced =======

Cost per unit

       =======             =======

Solutions

Expert Solution

Product Costs using the Current Costing System​ (Absorption Costing

OHR =​Total overhead/Mechine hours

​ =    $2,200,000/10,000HOURS

   =    220$ PER HOUR

   Pencils $ Markers $ Total $

Direct Material

 5000*5=25,000 1000*3=3,000 28,000
Direct Labor 2,00,000 3,00,000 5,00,000

Overhead    (OHR x MECHINE HOURS)

 8,80,000 13,20,000 22,00,000
Total Cost   11,05,000 16,23,000 27,28,000
÷Units produced    5000 units 1000 units 6000units
Cost per unit $ 221 1623 455

Product Costs using the ABC Costing System​

   OHR #1 = Machine setup-related /no.of set up= $ 200,000/80setups

=$2,500 per set up

   OHR #2 = Batch-related/no.of batchs = $500,000/1000 batchs

   =$500 per batch   

OHR #3 =OTHRS/ Machine hours = 1,500,000/10,000hours

=150$ per mechine hour

   Pencils $ Markers $ Total $
Direct Material 5000units*5$=25,000    1000units*3$=3,000 28,000
Direct Labor    2,00,000    3,00,000 5,00,000
Overhead  ​cost
setup related cost 30setups*$2500=75,000 30setups*$2500=1,25000 2,00,000
Batch changes realated 300batchs*$500=1,50,000 700Batchs*$500=3,50,000 5,00,000
other over head cost 4000hours*150$=6,00000 6000hours*150$=9,00,000 15,00,000
Total Cost   10,50,000 16,78,000 27,28,000
÷Units produced    5000 1000 6000
Cost per unit $ 210    1678    455

DECESSION

  • ​If i am the manager of pencil department should prefer activity based costing system
  • ​because it results Reduction in cost of overhead by 55,000$ (8,80,000-,8,25,000)
  • ​so product cost reduced by 11$ per unit (55,000$/5000units)

ekkarill92 answered 1 year ago
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