Question

Sunshine, Inc. manufactures two types of birdbaths, mosaic and cement. Mosaic are the more complex of the two products, requiring more direct labor time and more machine time per unit than the concrete model. Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity-based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers are as follows:

Activity Pool      Overhead Costs

Setup 256,000

Materials purchasing 110,000

Machining   136,000

Total Overhead Costs 502,000

   Cement    Mosaic

# of units produced 40,000 10,000

Dir materials cost $15.00 per unit $30.00 per unit

Dir labor cost $5.25 per unit $14.00 per unit

Direct labor hours 32,000 19,000

Setups 400 2,800

Purchase orders 2,070 680

Machine hours 8,000 19,200

1. Using the traditional method of allocating overhead based on direct labor hours, compute the unit product cost of mosaic and concrete birdbaths:

a) Determine the overhead rate per unit of the mosaic and concrete birdbaths.

b) Allocate overhead to each product based on the direct labor hours used by each product.

c) Determine the unit product cost.

2. Using an activity-based costing approach compute the unit product cost of the mosaic and concrete birdbaths.

3. Why do your answers in 1 and 2 differ? Which method provides a better cost per unit? Which method do you recommend to management giving the reason of why you prefer this method over the other and why the chosen method gives better results.

Answer 1

Answer 1) Traditional Method

Total overhead cost = 502000

Direct Labour hour per unit of

Mosaic = 32000/40000 = 0.80 hour per unit

Cement = 19000/10000 = 1.90 hour per unit

Overhead Cost per direct labour hour = 502000/51000

= 9.843

Calculation of Overhead per unit =

For mosaic = 9.843*0.80 = 7.87

For Cement = 9.843*1.90 = 18.70

Product Cost per unit = direct Material + Direct Labour cost + Overhead Cost

Mosaic = 15+5.25+7.87 = 28.12

Cement = 30+14+18.70 = 62.70

Answer 2)

Overhead cost on ABC based

Set up cost = 256000/(400+2800) = 80 per setup cost

Set up cost of per unit =

Mosaic = 400*80/40000 = 0.80 per unit

Cement = 2800*80/10000 = 22.40 per unit

Material purchasing cost per purchase order = 110000/(2070+680) = 40 per order

Material purchase cost per unit :

Mosaic = 40*2070/40000 = 2.07 per unit

Cement = 40*680/10000 = 2.72 per unit

Machining cost per hour = 136000/(8000+19200) = 5 per hour

Machining cost per unit

Of mosaic = 5*8000/40000 = 1

Cement = 5*19200/10000 = 9.60

  

Unit product cost = DM cost + DL cost + Set up cost + purchase cost + Machining Cost

Of Mosaic = 15+5.25+0.80+2.07+1 = 24.12

Cement = 30+14+22.40+2.72+9.60 = 78.72

Answer 3) Activities based costing approach is better then traditional costing method which give better cost analysis of Overhead of different units. ABC approach divide the cost of Overhead in units produce which give cost of such production.iproduction.in better way then traditional Method.