Question
In: Accounting
Activity Driver Driver Frequency Cost of Activity Direct Labor Direct Labor Hours 50,000 $ 1,250,000.00...
| Activity | Driver | Driver Frequency | Cost of Activity |
| Direct Labor | Direct Labor Hours | 50,000 | $ 1,250,000.00 |
| Vacuuming | Machine Hours | 2,000 | $ 62,000.00 |
| Set-up | Job | 5,000 | $ 200,000.00 |
| Testing | Tests made | 5,000 | $ 60,000.00 |
| Customer service | Orders taken | 1,200 | $ 30,000.00 |
| Invoicing | Invoices mailed | 2,400 | $ 48,000.00 |
| Total | $ 1,650,000.00 | ||
| Activity | Pool Opening | Pump Repair | Pool Cleaning |
| Materials | 350 | 1000 | 50 |
| Direct Labor Hours | 15 | 40 | 2 |
| Vacuuming | 3 | 0 | 2 |
| Set-up | 1 | 1 | 1 |
| Testing | 3 | 0 | 2 |
| Orders taken | 1 | 1 | 1 |
| Invoices | 2 | 2 | 1 |
|
Add 35% profit onto every job. |
|||
| a. Calculate the current overhead rate per direct labor hour | |||
| b. Calculate the cost of each of the jobs using direct labor hour as the rate | |||
| c. Calculate the price charged for the job | |||
| d. Calculate the ABC charging rates. | |||
| e. Recalculate the costs for each job using these new rates. | |||
| f. Once again calculate the price Tom would charge for each of these jobs. | |||
| g. What does a comparison of the results suggest? Be specific. | |||
Solutions
Expert Solution
| Answer: | |||||||
| Requirement a | Calculate the current overhead rate per direct labor hour | ||||||
| Current overhead rate per direct labor hour | =Total overhead cost/Total direct labor hours | ||||||
| =$1650,000/50,000 | |||||||
| $ 33.00 | |||||||
| Requirement b | The cost of each of the jobs using direct labor hour as the rate would be as follows: | ||||||
| Particulars | Pool Opening | Pump Repair | Pool Cleaning | ||||
| Direct material | $ 350 | $ 1,000 | $ 50 | ||||
| Direct Labor | $ 375 | ($25*15) | $ 1,000 | ($25*40) | $ 50 | ($25*2) | |
| Overhead cost | $ 495 | ($33*15) | $ 1,320 | ($33*40) | $ 66 | ($33*2) | |
| Total cost | $ 1,220 | $ 3,320 | $ 166 | ||||
| Add: Mark-up 35% | 427 | (1220*35%) | 1162 | (3320*35%) | 58.1 | (166*35%) | |
| Requirement c | The price of each product would be as follows: | ||||||
| Particulars | Pool Opening | Pump Repair | Pool Cleaning | ||||
| Total cost | $ 1,220 | $ 3,320 | $ 166 | ||||
| Add: Mark-up 35% | 427 | (1220*35%) | 1162 | (3320*35%) | 58.1 | (166*35%) | |
| Selling Price | $ 1,647 | ($1220+427) | $ 4,482 | (3320+1162) | $ 224 | (166+58.1) | |
| Requirement d | The ABC charging rates would be as follows: | ||||||
| Activity | Driver | Driver Frequency | Cost of Activity | Cost per activity | |||
| Direct Labor | Direct Labor Hours | 50,000 | $ 1,250,000.00 | $ 25 | ($1250000/50000) | ||
| Vacuuming | Machine Hours | 2,000 | $ 62,000.00 | $ 31 | ($62000/2000) | ||
| Set-up | Job | 5,000 | $ 200,000.00 | $ 40 | ($200000/5000) | ||
| Testing | Tests made | 5,000 | $ 60,000.00 | $ 12 | ($60000/5000) | ||
| Customer service | Orders taken | 1,200 | $ 30,000.00 | $ 25 | ($30000/1200) | ||
| Invoicing | Invoices mailed | 2,400 | $ 48,000.00 | $ 20 | ($48000/2400) | ||
| Total | $ 1,650,000.00 | ||||||
ekkarill92 answered 1 year agoRelated Solutions
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Direct labor or machine hours may not be the appropriate cost driver for overhead in all...
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manufacturing
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Estimated machine hours
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Direct labor or machine hours may not be the appropriate cost
driver for overhead in all areas of manufacturing due to the
complexities of many manufacturing processes. Many companies use
activity-based costing (ABC) which uses multiple drivers (items
that consume resources) rather than just one driver to apply
overhead to their activities. With ABC, a company can use a cost
driver that has a direct cause/effect relationship in its applied
overhead costs.
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