Question

Problem 2

Cabanos Company manufactures two products, Product C and Product D. The company estimated it would incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labour hours. Data concerning the current period's operations appear below:

Product C Product D Estimated Volume (units) 3,400 4,800 Direct Labour Hours per Unit 1.40 1.90 Direct Materials Cost per Unit $ 7.40 $12.70 Direct Labour Cost per Unit $14.00 $19.00 Required

a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labour hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below: Activity Cost Pool Est. Overhead Cost Expected Activity Product C Product D Total Machine setups $12,190 80 150 230 Purchase orders 79,200 730 920 1,650 General factory 69,400 4,760 9,120 13,880 Total $160,790 Determine the unit product cost of each product for the current period using the activity-based costing approach.

c. Explain whether or not it would advantageous to implement an ABC system.

Answer 1

Products	C	D	Total
Sales units	3400	4800
Direct labor per unit	1.4	1.9
Total direct labor hours	4760	9120	13880
	=3400*1.4	=4800*1.9
Direct material cost per unit	7.4	12.7
Total direct material cost	25160	60960	86120
	=3400*7.4	=4800*12.7
Direct labor cost per unit	14	19
Total direct labor costs	47600	91200	138800
	=3400*14	=4800*19

a	Predetermined overhead rate	=overhead costs/direct labor hours
		=160790/13880
		11.58429395
	Unit product costs
		C	D
	Direct material	7.4	12.7
	Direct labor	14	19
	Manufacturing overhead	16.22	22.01
		=11.58*1.4	=11.58*1.9
	Total costs	37.62	53.71

			expected activity
b	Activity cost pool	Estimated overhead cost	Product C	Product D	Total	Cost per activity
	Total machine set ups	12190	80	150	230	=12190/230	53
	Purchase orders	79200	730	920	1650	=79200/1650	48
	General factory	69400	4760	9120	13880	=69400/13880	5
		160790

	Product C	Product D
Direct material costs	25160	60960
Direct labor costs	47600	91200
Manufacturing overhead
Total machine set ups	4240	7950
	=80*53	=150*53
Purchase orders	35040	44160
	=730*48	=920*48
General factory	23800	45600
	=4760*5	=9120*5
Total costs	135840	249870
Units	3400	4800
Per unit cost	39.95	52.06

C. Activity based costing is the method of costing in which instead of determining costs through plant wide rates the total costs are bifurcated into various segments based on activity and driver is decided based on which per driver costs is determined. In cases where there are multiple products which require various activities to it's completion, it may be possible that the proportion of such activities vary in each product hence using plantwide rate may not provide accurate costs to determine pricing and hence in large units costs are allocated based on activities. Activity based costing provide more accurate costing than plantwide predetermined rates and hence helps in competitive pricing, also helps in eliminating unproductive activities and reduce costs but in case of small firms sometimes it proves to be tedious and costly