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.