Question

Sonoma Manufacturing has five activity cost pools and two products (a budget tape vacuum and a deluxe tape vacuum). Information is presented below:

                                                                                                         Cost Drivers by Product

Activity Cost Pool                     Cost Driver          Est. Overhead           Budget             Deluxe  

Ordering and Receiving             Orders                     $   120,000                  600                  400

Machine Setup                          Setups                          297,000                  500                  400

Machining                                Machine hours           1,000,000            150,000            100,000

Assembly                                  Number of Parts        1,600,000         1,400,000            800,000

Inspection                                Inspections                   300,000                  550                  450

Instructions

Compute the estimated overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent.

Assume Sonoma used a more traditional OH allocation method and used only machine hours to allocate MOH. How much overhead would be assigned to each product and what are the estimated unit OH for each product?

The company estimates that DM costs for the Budget model are $2.10 per unit and the DL costs are $3.40. The DM costs for the Deluxe model are $9.40 and the DL costs are $4.10. What is the projected product cost for each model?

Answer 1

Solution:

ABC -  overhead cost per unit for each produc

Allocation of overhead to product and computation of overhead cost per unit (ABC System)
Activity cost pool	cost driver	Estimated overhead cost	Expected cost drivers	Activity rate of activity cost pool	Budget		Deluxe
					Expected activity	Allocated overhead	Expected activity	Allocated overhead
Ordering and receiving	orders	$120,000.00	1000	$120.00	600	$72,000.00	400	$48,000.00
Machine setup	setus	$297,000.00	900	$330.00	500	$165,000.00	400	$132,000.00
Machining	Machine hours	$1,000,000.00	250000	$4.00	150000	$600,000.00	100000	$400,000.00
Assembly	number of parts	$1,600,000.00	2200000	$0.73	1400000	$1,018,181.82	800000	$581,818.18
Inspection	inspections	$300,000.00	1000	$300.00	550	$165,000.00	450	$135,000.00
Total		$3,317,000.00				$2,020,181.82		$1,296,818.18
Total units						700000		200000
Overhead cost per unit						$2.89		$6.48

Traditional Allocation method:

Predetermined Overhead rate = Total Overhead / total machine hours = $3317000 / 250000 = $13.268

Overhead Allocation to Product - Traditional allocation method
Particulars	Budget	Deluxe
Machine Hours	150000	100000
Overhead rate	$13.268	$13.268
Allocated overhead	$1,990,200.00	$1,326,800.00
Nos of units	700000	200000
Overhead cost per unit	$2.84	$6.63

Projected Product Cost:

Computation of Projected product cost per unit and total cost of product Using ABC Costing method
Particulars	Product S109	Product N227
Direct material per unit	$2.10	$9.40
Direct labor per unit	$3.40	$4.10
Overhead per unit	$2.89	$6.48
Unit Product Cost	$8.39	$19.98
Nos of units	700000	200000
Total cost of product	$5,870,181.82	$3,996,818.18

Computation of Projected product cost per unit and total cost of product Using Traditional method
Particulars	Budget	Deluxe
Direct material per unit	$2.10	$9.40
Direct labor per unit	$3.40	$4.10
Overhead per unit	$2.84	$6.63
Unit Product Cost	$8.34	$20.13
Nos of units	700000	200000
Total cost of product	$5,840,200.00	$4,026,800.00