Question

Product-Costing Accuracy, Plantwide and Departmental Rates, ABC

Escuha Company produces two type of calculators: scientific and business. Both products pass through two producing departments. The business calculator is by far the most popular. The following data have been gathered for these two products:

	Product-Related Data
	Scientific	Business
Units produced per year	75,000	750,000
Prime costs	$235,000	$2,350,000
Direct labor hours	97,800	978,000
Machine hours	50,600	506,000
Production runs	100	150
Inspection hours	2,000	3,000
Maintenance hours	2,250	9,000

	Department Data
	Department 1	Department 2
Direct labor hours:
Scientific calculator	72,900	24,900
Business calculator	97,800	880,200
Total	170,700	905,100
Machine hours:
Scientific calculator	25,200	25,400
Business calculator	393,120	112,880
Total	418,320	138,280
Overhead costs:
Setup costs	$236,000	$236,000
Inspection costs	170,000	170,000
Power	244,000	134,000
Maintenance	210,000	228,750
Total	$860,000	$768,750

Required:

1. Compute the overhead cost per unit for each product using a plantwide, unit-based rate using direct labor hours. Round your calculations and answers to the nearest cent.

Plantwide rate	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

2. Compute the overhead cost per unit for each product using departmental rates. In calculating departmental rates, use machine hours for Department 1 and direct labor hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per machine hour
Department 2	$ per direct labor hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

Repeat using direct labor hours for Department 1 and machine hours for Department 2. Round departmental rates and the overhead cost per unit to the nearest cent if rounding is required.

Departmental rates:
Department 1	$ per direct labor hour
Department 2	$ per machine hour
Overhead cost per unit:
Scientific	$ per unit
Business	$ per unit

3. Compute the overhead cost per unit for each product using activity-based costing. Round your calculations and answers to the nearest cent.

	Overhead Cost
Scientific	$ per unit
Business	$ per unit

Answer 1

1) Budgeted Overhead per labour hour = ($860000+$768750)/(170700+905100)

= $1628750/1075800

= $1.514

Overhead Cost Per Unit for each Product :-

Scientific = ($1.514 * 97800) / 75000 = $1.97 per unit

Business = ($1.514 * 978000) / 750000 = $1.97 per unit

2) a. Machine hours for department 1 and Direct labor hours for Department 2.

Dept. 1 = Overhead Cost / Machine Hours

= $860000/ 418320 H

= $2.06 Par Machine Hour

Dept. 2 = Overhead Cost / Direct Labor Hours

= $768750 / $905100

= $0.85 Per Labor Hour

Scientific = ($2.06*25200 + $0.85*24900) / 75000

= ($51912 + $21165) / 75000

= $0.974 per unit

Business = ($2.06*393120 + $0.85*880200) / 750000

= ($809827 + $748170) / 750000

= $2.08 Per unit

b)

Dept. 1 = Overhead Cost / Direct Labor Hour

= $860000/ 170700 H

= $5.04 Par Direct Labor Hour

Dept. 2 = Overhead Cost / Machine Hours

= $768750 / $138280

= $5.56 Per Machine Hour

Scientific = ($5.04*72900 + $5.56*25400) / 75000

= ($367416 + $141224) / 75000

= $6.78 per unit

Business = ($5.04*97800 + $5.56*112880) / 750000

= ($492912 + $627613) / 750000

= $1.49 Per unit

3)

Activty	cost driver	Total Cost	Scientific	Business
Set up cost	No of Production run (0.4 : 0.6)	472000	188800	283200
Inspection cost	Inspection Hours (0.4 : 0.6)	340000	136000	204000
Power	Machine Hours(1 : 11)	378000	34364	343636
Maintenance	Maintenance Hour(0.2 : 0.8)	438750	87750	351000
	Total (A)	1628750	446914	1181836
	No. of Units (B)	825000	75000	750000
	Cost Per Unit (A/B)		$5.96	$1.58