Question

Willow Company produces lawn mowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant:

	Basic Model	Deluxe Model
Expected quantity	40,000	20,000
Selling price	$180	$360
Prime costs	$80	$160
Machine hours	5,000	5,000
Direct labor hours	10,000	10,000
Engineering support (hours)	1,500	4,500
Receiving (orders processed)	250	500
Materials handling (number of moves)	1,200	4,800
Purchasing (number of requisitions)	100	200
Maintenance (hours used)	1,000	3,000
Paying suppliers (invoices processed)	250	500
Setting up equipment (number of setups)	16	64

Additionally, the following overhead activity costs are reported:

Maintaining equipment	$114,000
Engineering support	120,000
Materials handling	?
Setting up equipment	96,000
Purchasing materials	60,000
Receiving goods*	40,000
Paying suppliers	30,000
Providing space	20,000
Total	$ ?

* Receiving activity cost includes allocated share of forklift operators’ salaries.

Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $40,000 each. The operators spend 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs $3 per move. Depreciation amounts to $8,000 per forklift per year.

1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers.

	Costs	Resource Drivers
Labor
Gasoline
Depreciation
Total Cost

2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs. (Round your answers to two decimal places.)

Plantwide overhead rate: —— per DLH

	Basic:  overhead cost—— per unit
	Deluxe:  overhead cost—— per unit

3. Calculate activity rates and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2. (Round your answers to two decimal places.)

Note: Be sure to complete both tables below before answering the following question:

The     costs are a closer representation of actual resource consumption.

Activity rates:

Maintenance per maintenance hour

Engineering per engineering hour

Materials handling per move

Setting up per setup

Purchasing per requisition

Receiving per order processed

Paying suppliers per invoice processed

Providing space per machine hour

4. Calculate consumption ratios for each activity. (Round your answers to two decimal places.)

	Basic	Deluxe
Maintenance
Engineering
Materials handling
Setting up
Purchasing
Receiving
Paying suppliers
Providing space

5. CONCEPTUAL CONNECTION Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates.

(a) Complete the statement below regarding when products consume activities.

When products consume activities in the same proportion , the activities can be combined into one pool . Using these consumption ratios as a guide, we create four pools.

(b) Calculate the rates that would apply under this approach. (Round to two decimal places.)

Pool 1	per unit
Pool 2	per unit
Pool 3	per unit
Pool 4	per unit

Answer 1

1	Cost of the materials handling activity:
					Costs	Resource driver
	Labor		(40000*3*75%)		90000	Time
	Gasoline		(1200+4800)*3		18000	Number of moves
	Depreciation		(8000*2)		16000	Directly traceable
	Total Cost				124000

2	Plantwide overhead rate=Total overhead cost/Total direct labor hours
	Total overhead cost:
				$
	Maintaining equipment			$114,000
	Engineering support			120,000
	Materials handling			124000
	Setting up equipment			96,000
	Purchasing materials			60,000
	Receiving goods*			40,000
	Paying suppliers			30,000
	Providing space			20,000
	Total			$604,000
	Total direct labor hours=10000+10000=20000
	Plantwide overhead rate=604000/20000=$ 30.20 per DLH
	Cost per unit:
				Basic model	Deluxe model
	Prime costs			80	160
	Overhead costs:
	Basic	30.20*(10000/40000)		7.55
	Deluxe	30.20*(10000/20000)			15.1
	Total			87.55	175.1

3

Activity rates:

Overhead cost

Activity drivers

Total

Activity rate

a

b

a/b

Maintaining equipment

$114,000

Maintenance hours used

4000

$28.50

per maintenance hour

(1000+3000)

Engineering support

120,000

Engineering support hours

6000

$20.00

per engineering hour

(1500+4500)

Materials handling

124000

Number of moves

6000

$20.67

per move

(1200+4800)

Setting up equipment

96,000

Number of setups

80

$1,200.00

per setup

(16+64)

Purchasing materials

60,000

Number of requisitions

300

$200.00

per requisition

(100+200)

Receiving goods

40,000

Orders processed

750

$53.33

per order processed

(250+500)

Paying suppliers

30,000

Invoices processed

750

$40.00

per invoice processed

(250+500)

Providing space

20,000

Machine hours

10000

$2.00

per machine hour

(5000+5000)

Total

$604,000