Question

Mexpal Corporation manufactures two models of power drills, a standard and a deluxe model. The following activity and overhead cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 15 10 800 Deluxe 35 15 400 Set-up activity Inspection Activity Overhead costs $40,000 $32,000

1. Assume a traditional costing system applies the total overhead costs (sum of set-up activity and inspection activity costs) based on direct labor hours. What is the total amount of overhead cost assigned to the Standard and Deluxe model, respectively?

2. Number of setups and number of components are identified as activity-cost drivers for the set-up activity and inspection activity, respectively. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the Standard and Deluxe model, respectively?

3. Mexpal hopes to reduce the overhead costs associated with the setups in the long-run keeping the production at current levels: i) By reducing the cost of performing each set up by 10% and ii) By reducing the setups for standard from 15 to 10 and for deluxe from 35 to 30. What are the expected savings in overhead costs related to setups assuming an activity-based costing system is used?

Answer 1

	Standard	Deluxe	Total
No. ofsetups	15	35	50
No of components	10	15	25
No. Of direct labor hours	800	400	1200
Set up cost			$40,000
Inspection cost			$32,000
Total overhead cost A			$72,000
Total direct labor hours B			1200
Overhead cost per DLH A/B			$60
ans 1	Standard	Deluxe
Overhead cost per DLH	$60	$60
No. Of direct labor hours	800	400
Overhead cost assigned B*C	$48,000	$24,000	ans 1

Column1	Column2	Column3	Column4	Column5	Column6	Column7	Column8	Column9
							Standard	Deluxe
	Overhead cost O	Standard S	Deluxe	Total T		Overhead cost per activity C= O/T	Cost allocated C*S	Cost allocated C*D
Set up cost	$40,000	15	35	50	No. ofsetups	$800	$12,000	$28,000
Inspection cost	$32,000	10	15	25	No pf components	$1,280	$12,800	$19,200
	$72,000			ans 2	Total overhead cost assigned	$24,800	$47,200
ans 3
Expected Savings	$11,200
						Standard	Deluxe	Total
		Standard S	Deluxe D		Overhead cost per activity C	Cost allocated C*S	Cost allocated C*D
Set up cost S		10	30		$720	$7,200	$21,600
					(800*90%)
Original overhead cost allocated O						$12,000	$28,000
					Savings S-O	$4,800	$6,400	$11,200

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