In: Accounting
Slacker Slacks Inc. (SSI) is a high-end clothing manufacturer. SSI makes Slacks® and Sleeks®. As part of a process improvement initiative, SSI management decided to transition from a traditional single-driver overhead costing system based on direct labor cost (estimated at $60,000) to an activity-based costing system. In doing so, SSI will trace direct materials and direct labor directly to products while allocating other costs based on activities.
Cost Object |
Estimated Cost |
Activity Driver |
Estimated Activity |
Machine Setup |
$360,000 |
Setups |
400 |
Material Handling |
$100,000 |
Yards of Material |
50,000 |
Utilities (All) |
$40,000 |
Kilowatt-hours |
40,000 |
The following actual activity relates to the two products.
Slacks® |
Sleeks® |
|
Units Produced |
4,000 |
20,000 |
Direct Material Cost |
$42,000 |
$54,000 |
Direct labor cost |
$24,000 |
$40,000 |
Number of Setups |
300 |
200 |
Yards of Material |
10,000 |
30,000 |
Kilowatt-hours |
16,000 |
25,000 |
Problem: For Slacker Slacks Inc., compute the product cost prior to over/under-applied overhead using the original costing system. Assuming all costs were estimated correctly, by how much is overhead over/under applied? How much of the over/under applied overhead should be allocated to each product?
Problem: For Slacker Slacks Inc., compute the product cost prior to over/under-applied overhead using the activity based costing system. Assuming all costs were estimated correctly, by how much is overhead over/under applied? How much of the over/under applied overhead should be allocated to each product?
1). Calculation of Product Cost prior to over/under-applied
overhead using the original costing system.
Total manufacturing overhead = $360000 + $100000 + $40000 =
$500,000
Estimated direct labor cost = $60000
Overhead rate per $1 of direct labor cost = $500000 / $60000 =
$8.33
Overhead allocated to Product Slacks = $8.33 * $24000 =
$199,920
Overhead allocated to Product Sleeks = $8.33 * $40000 =
$333,200
Total Overhead allocated = $199,920 + $333.200 = $533,120
Product Cost : Slack = $42000 + $24000 + $199,920 =
$265,920
Sleek = $54000 + $40000 + $333,200 = $427,200
Overhead Overapplied = $533,120 - $500,000 = $33,120
Overapplied Overhead allocated to Slack = $33120 / $533120 *
$199,920 = $12420
Overapplied Overhead allocated to Sleek = $33120 / $533120 *
$333,200 = $20700
2). Calculation of Product Cost prior to over/under-applied
overhead using the activity based costing system.
Calculation of Overhead rate for each acitivity:
Machine Setup cost rate = $360,000 / 400 setups= $900 per
setup
Material handling cost rate = $100,000 / 50000 yards = $2 per
yard
Utilities cost rate = $40000 / 40000 hrs = $1 per hr.
Overhead allocated to Product Slacks:-
Machine Setup Cost = 300 setups * $900 = $270,000
Material handling cost = 10000 yards * $2 = $20,000
Utilities cost = 16000 hrs * $1 = $16,000
Total overhead allocated to Slack = $306,000
Overhead allocated to Product Sleeks:-
Machine Setup Cost = 200 setups * $900 = $180,000
Material handling cost = 30000 yards * $2 = $60,000
Utilities cost = 25000 hrs * $1 = $25,000
Total overhead allocated to Slack = $265,000
Product Cost : Slack = $42000 + $24000 + $306000 =
$372,000
Sleek = $54000 + $40000 + $265000 = $359,000
Total overhead applied = $265,000 + $306,000 = $571,000
Overhead overapplied = $571,000 - $500,000 = $71,000
Now allocation of overhead overapplied to be done just like the Problem 1). but it should be done on each activity basis like Machine Setup, Material handling and Utilties.