Question

MotoMover makes three models of motorized skateboards. At present, all indirect costs are applied to production using a single predetermined overhead (OH) rate based on direct labour-hours. Management would like you to provide an analysis of the costs of manufacture of the three models that compares the present approach to costing with the ABC approach to costing. Management is not confident that its products are priced appropriately relative to its competitors. The following information has been assembled regarding the activity cost pools and cost drivers.

  

Activity	Recommended Activity Measure	Estimated Overhead Cost			Annual Expected Volume of Activity Measure
Order processing	Number of orders	$	210,000		190	orders
Materials handling	Materials used (kilograms)		517,720		122,800	kilograms
Machine depreciation    and maintenance	Machine-hours		324,500		17,100	hours
Quality control	Number of inspections		76,000		50	inspections
		$	1,128,220

  

In addition, management estimates that 40,000 DLHs will be used in the upcoming year, at a rate of $12 per hour. Assume that the following activity took place in the first month of the upcoming year:

  

	Economy			Deluxe			Supreme
Number of units produced		27,000			10,000			4,000
Direct materials costs	$	27,880		$	19,600		$	13,000
Direct labour-hours		650			1,225			2,100
Number of orders		6			4			3
Number of production runs		2			2			3
Kilograms of materials used		10,000			4,600			2,500
Machine-hours		1,520			540			400
Number of inspections		3			3			3
Number of units shipped		20,000			8,750			2,750

  

Required:

1.	Compute the production cost for each product in the first month of the upcoming year, using DLHs as the allocation base. (Round your intermediate calculations to nearest cent.) Economy Deluxe Supreme
	Direct material Direct Labour Overhead Total production cost

     

2.	Compute the production cost for each product in the first month of the upcoming year, using ABC. (Round your intermediate calculations to nearest cent.)
	Economy Deluxe Supreme Direct material Direct labour Overhead Total product cost

Answer 1

1
	Economy	Deluxe	Supreme
Direct materials costs	27,880	19,600	13,000
Direct labour Cost	7,800	14,700	25,200
Overhead Cost	18,200	34,300	58,800
Total Cost	53,880	68,600	97,000
Number of units produced	27,000	10,000	4,000
Cost per Unit	2.00	6.86	24.25

Estimated Overhead Cost	1,128,220
Estimated Labour Hour	40,000
Predetermined overhead	28.21

2
	Economy	Deluxe	Supreme
Direct materials costs	27,880	19,600	13,000
Direct labour Cost	7,800	14,700	25,200
Overhead Cost:
Order processing	8,077	5,385	4,038
Materials handling	25,230	11,606	6,308
Machine depreciation and maintenance	16,709	5,936	4,397
Quality control	2,111	2,111	2,111
Total Overhead Cost	52,127	25,038	16,854
Total Cost	87,807	59,338	55,054
Number of units produced	27,000	10,000	4,000
Cost per Unit	3.25	5.93	13.76

Activity	Activity Measure	Estimated Overhead Cost per Month	Annual Expected Volume of Activity Measure		Cost per Activity
Order processing	Number of orders	17,500.00	13	orders	1,346
Materials handling	Materials used (kilograms)	43,143.33	17100	kilograms	3
Machine depreciation and maintenance	Machine-hours	27,041.67	2460	hours	11
Quality control	Number of inspections	6,333.33	9	inspections	704
		94,018.33

	Economy	Deluxe	Supreme	Total
Number of orders	6	4	3	13
Kilograms of materials used	10,000	4,600	2,500	17,100
Machine-hours	1,520	540	400	2,460
Number of inspections	3	3	3	9

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