Question

In: Accounting

Slacker Slacks Inc. (SSI) is a high-end clothing manufacturer. SSI makes Slacks® and Sleeks®. As part...

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?

Solutions

Expert Solution

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.


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