Question

Double Bounce Trampolines produces two models of trampolines for backyard fun. The “Original”, and
the recently introduced “Deluxe”. The Deluxe model introduced several safety features that were
intended to scare overly protective parents into upgrading. Since its introduction, the deluxe model has
been increasing in sales, but at the same time, the company’s profits have been declining. The CFO
believes that the company’s traditional costing system may be to blame. Currently, the company uses
direct-labour hours as the basis for applying overhead. The company estimates that it will incur
$600,000 in overhead costs in the next year.
The following cost data is known:
Original Deluxe
Direct Materials $50 $75
Direct Labour ($10 per hour) 20 hours 30 hours
Number of units produced 7,000 units 2,000 units
The CFO wishes to explore an activity-based costing system
Activity (Cost Driver) Estimated MOH Expected Activity
Total Standard Deluxe
Assembly (Labour Hours) $100,000 20,000 14,000 6,000
Receiving (Receiving Reports) 200,000 4,000 2,000 2,000
Testing (Number of Tests) 300,000 1,000 200 800
$600,000
Required:
a.) Under the traditional costing method:
i. Compute the predetermined overhead rate.
ii. Determine the unit cost of each product.
b.) Under activity based costing:
i. Compute the activity rates for each activity.
ii. Determine the expected unit cost of each product.
c.) Compare and comment on your answers from parts a.) and b.) above.
d.) If ABC produces more accurate cost data, why is it not more widely used?

Answer 1

(a) Traditional Costing :-

(i) Predetermined overhead rate:-

   Total Overhead/Total Direct Labour Hrs

Total O/H = $600000

Total Labour hrs = (7000 units * 20 hrs) + (2000 units * 30 hrs) = 200000 hrs

O/H rate = 600000/20000 = $ 30

(ii)

	Original	Deluxe
Direct Material	50	75
Direct Labour	20	30
O/H	(30 * 2) =60	(30 * 3) =90
Unit cost	130	195

(b) Activity Based Costing :-

(i)Activity Rates for each activity :-

Activity	Cost Driver	Estimated MOH	Expected Activity	Cost/Activity
Assembly	Labour Hrs	100000	20000	5
Receiving	Receiving Reports	200000	4000	50
Testing	No of Tests	300000	1000	300

(ii)

	Original	Deluxe
Direct Material	50	75
Direct Labour	20	30
O/H:-
Assembly	(5 * 14000)/7000 =10	(5 * 6000)/2000 =15
Receiving	(50 * 2000)/7000 =14.28	(50 * 2000)/2000 =50
Testing	(300 * 200)/7000 =8.57	(300 * 800)/2000 =120
Unit cost	102.85	290

In the detail of cost:

Direct Labour ($10 per hour) 20 hours 30 hours

I think instead of 20 & 30 Hours, it is $ 20 & $ 30

In other words, Direct Labour hrs = 2 & 3

Total Direct Labour hrs = (7000 units * 2 hrs) + (2000 units * 3 hrs) = 20000 hrs

In ABC cost driver total Direct Labour hrs also given = 20000 hrs