Question

You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic” and the “Superjet” which promises a jet power setting that “borders on cruel”. Since the introduction of the Superjet, the company’s profits have been faltering, despite increased sales. The company’s senior accountant believes that the costing system may be causing problems. The company uses direct-labour hours as the basis for applying overhead. Overhead is estimated to be $300,000.
The following cost data is known:

Basic
Superjet
Direct Materials
$700
$1200
Direct Labour ($15 per hour)
60
90
Number of units produced
600 units
100 units

The CFO wishes to explore an activity-based costing system

Activity (Cost Driver)
Estimated MOH
Expected Activity




Total
Basic
Superjet

Assembly (Labour Hours)
$60,000
3,000
2,400
600

Quality control (Inspection Hours)
75,000
800
600
200

Machining (Machine Hours)
25,000
40,000
30,000
10,000

Parts Admin (Number of Parts)
140,000
500
100
400


$300,000

Required - Provide detailed solutions/ answers to the following:
a.)    a) Under the traditional costing method:
  i.      Compute the predetermined overhead rate.
  ii.      Determine the unit cost of each product.
b.) b) Under activity based costing:
  i.      Compute the activity rates for each activity.
  ii.      Determine the expected unit cost of each product.
c.)    c) Compare and comment on your answers from parts a.) and b.) above.
d.)   d) If ABC produces more accurate cost data, why is it not more widely used?

Answer 1