Wayfarer Corporation is contemplating changing its cost system to an activity-based costing system and wants to...

Wayfarer Corporation is contemplating changing its cost system to an activity-based costing system and wants to know more about the effects of doing so. The corporation’s cost accountant has identified three overhead cost pools along with the cost drivers associated with each pool as follows:

Cost Pools	Cost	Activity Drivers
Utilities	$5,420,000	180,000 machine hours
Delivery	5,420,000	10,000 deliveries
Assembly	10,940,000	2,000,000 pounds of materials

The corporation makes three models of kitchen sinks (Deluxe, Premium, and Standard). The plans for production for the next year and the direct costs that have been budgeted for activity by product are listed below:

	Deluxe	Premium	Standard
Total Direct Cost (Material and Labor)	$850,000	850,000	850,000
Total Machine Hours	210,000	95,000	154,000
Total Deliveries	310	620	480
Total Pounds of Material	1,800,00	1,200,000	2,600,000
Total direct labor hours	12,400	8,500	18,600
Number of Units produced	18,000	12,000	24,000

A. The current cost accounting system charges overhead to products on the basis of direct labor-hours. What unit product costs will be reported for the three products assuming the current cost system continues to be used?

B. What are the cost driver rates associated with the three cost pools specified by the cost accountant?

C. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant’s categorization of cost pools is utilized?

Expert Solution

A)Total overhead : 5420000+5420000+20940000=21780000

Total direct labor hours: 12400+8500+18600=39500

Overhead rate per hour : 21780000/39500=$ 551.39

	Deluxe	Premium	standard
Direct cost	850000	850000	850000
overhead cost	12400*551.39= 6837236	8500*551.39=4686815	18600*551.39 = 10255854

Total	7687236	5536815	11105854
Number of units	18000	12000	24000
cost per unit	$ 427.07	461.40	462.74

B)


Utilities	5420000/180000	=$ 30.11 per MH
Delivery	5420000/10000	$ 542 Per delivery
Assembly	10940000/2000000	5.47 pounds of materials

c)

	Deluxe	premium	standard
Direct cost	850000	850000	850000
Utilities	210000*30.11= 6323100	95000*30.11=2860450	154000*30.11=4636940
Delivery	310*542=168020	620*542= 336040	480*542=260160
Assembly	1800000*5.47=9846000	1200000*5.47=6564000	2600000*5.47= 14222000

Total cost	17187120	10610490	19119100
units produced	18000	12000	24000
unit cost	17187120/18000= 954.84	884.21	796.63

ekkarill92 answered 1 year ago

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