Question

Fenway Electronics produces video games in three market categories: commercial, home, and miniature. Fenway has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

Category Total Pooled Cost Types of Costs Cost Driver Unit $ 360,000

Indirect labor wages, supplies, factory utilities, machine maintenance Machine hours

Batch 194,400

Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling Number of production orders

Product 105,600

Research and development Time spent by research department

Facility 300,000

Rent, general utilities, maintenance, facility depreciation, admin. salaries Square footage

Additional data for each of the product lines follow:

Commercial Home Miniature Total

Direct materials cost $ 25.00 /unit $ 15.00 /unit $ 12.00 /unit —

Direct labor cost $ 10.00 /hour $ 8.00 /hour $ 9.00 /hour —

Number of labor hours 6,000 12,000 2,000 20,000

Number of machine hours 10,000 45,000 25,000 80,000

Number of production orders 200 2,000 800 3,000

Research and development time 10 % 20 % 70 % 100 %

Number of units 15,000 45,000 14,000 74,000

Square footage 20,000 50,000 30,000 100,000

  
Required

Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

Answer 1

Solution:

Calculation of Cost of Direct Material and Direct Labour

	Commercial	Home	Miniature
Direct Material = Direct materials cost per unit x Number of units	3,75,000.00	6,75,000.00	1,68,000.00
Direct Labour = Direct Labour cost per unit x Number of units	1,50,000.00	3,60,000.00	1,26,000.00
Total Direct Cost	5,25,000.00	10,35,000.00	2,94,000.00

Solution 1) Calculation of Total Cost and Cost per unit using direct labour hours as an allocation base:

Total Number of Labour Hours = Commercial + Home + Miniature

                                                   = 6,000 + 12,000 + 2,000 = 20,000 Hours

Total Overhead Cost = Unit Level + Batch Level + Product Level + Facility Level

                                   = $360,000 + $194,400 + $105,600 + $300,000 = $960,000

Therefore, Overhead cost per labour hour = Total Overhead Cost / Total Number of Labour Hours

= $960,000 / 20,000 Hours = $48.00 per Hour

	Commercial	Home	Miniature
Number of labor hours	6,000.00	12,000.00	2,000.00
Rate of Overheads per Hour	48.00	48.00	48.00
Total Overheads allocated	2,88,000.00	5,76,000.00	96,000.00

Calculation of Total Cost, Cost per unit and Combined Cost of all three product lines considering labour hours as a base for allocation

	Commercial	Home	Miniature	Total Cost
Total Direct Cost $	5,25,000.00	10,35,000.00	2,94,000.00	18,54,000.00
Total Overheads allocated $	2,88,000.00	5,76,000.00	96,000.00	9,60,000.00
Total Cost $ = Total Direct Cost + Total Overheads allocated	8,13,000.00	16,11,000.00	3,90,000.00	28,14,000.00
Unit of Units produced	15,000.00	45,000.00	14,000.00
Cost Per Unit $	54.20	35.80	27.86

       

Solution 1) Calculation of Total Cost and Cost per unit using Activity Based Costing System:

Calculation of Rate per Cost Driver:

Category	Cost $	Cost Driver	Number of Cost Drivers	Rate Per Cost Driver = Cost $ / Number of Cost Drivers
Unit	3,60,000.00	Machine hours	80,000 Machine Hours	$4.50 per Machine Hour
Batch	1,94,400.00	Number of production orders	3,000 Production orders	$64.80 per Production order
Product	1,05,600.00	Time spent by research department	100%	$1056.00 per %
Facility	3,00,000.00	Square footage	1,00,000 Square feet	$3.00 per Square feet
	9,60,000.00

Allocation of Overheads to the products as per Activity Based Costing System:

	Commercial			Home			Miniature
Cost Driver	Number of Activities	Activity Rate $	Cost $	Number of Activities	Activity Rate $	Cost $	Number of Activities	Activity Rate $	Cost $
Unit	10,000	4.50	45,000.00	45,000	4.50	2,02,500.00	25,000	4.50	1,12,500.00
Batch	200	64.80	12,960.00	2,000	64.80	1,29,600.00	800	64.80	51,840.00
Product	10	1,056.00	10,560.00	20	1,056.00	21,120.00	70	1,056.00	73,920.00
Facility	20,000	3.00	60,000.00	50,000	3.00	1,50,000.00	30,000	3.00	90,000.00
Total Overheads	1,28,520.00			5,03,220.00			3,28,260.00

Calculation of Total Cost, Cost per unit and Combined Cost of all three product lines using Activity Based Costing System:

	Commercial	Home	Miniature	Total Cost
Total Direct Cost $	5,25,000.00	10,35,000.00	2,94,000.00	18,54,000.00
Total Overheads allocated $	1,28,520.00	5,03,220.00	3,28,260.00	9,60,000.00
Total Cost $ = Total Direct Cost + Total Overheads allocated	6,53,520.00	15,38,220.00	6,22,260.00	28,14,000.00
Unit of Units produced	15,000	45,000	14,000
Cost Per Unit $	43.57	34.18	44.45