Question

Smokey and the Bandit produces outdoor activity clothing. The product line consists of pants, jackets, tops, and accessories. Data has been collected related to direct materials and direct labor for the four product lines. Smokey and the Bandit has also collected information on four possible cost drivers (units, batches, machine hours, labor hours). All this information is listed below. Construct a spreadsheet that will allocate overhead for each of these alternative drivers and will calculate the total per unit cost for each product line. Use the VLOOKUP function when constructing the spreadsheet so that you can determine the effect of different cost drivers on the overhead allocated and the resulting cost per unit.   

Product Line	Units		Average Sales Price per unit	Total Material Cost	Total Labor Cost
Pants		4,600	$73	$234,600	$20,115
Jackets		2,500	$98	$145,000	$25,200
Tops		9,800	$36	$156,800	$32,970
Accessories		18,500	$12	$ 37,000	$15,210

Product Line	Batches			Machine Hours		Labor Hours
Pants			42		1,640	1,341
Jackets			26		1,730	1,400
Tops			78		2,600	2,198
Accessories			95		2,250	845

Total overhead cost to be allocated: $321,560

After constructing your spreadsheet answer the following questions?

1. What is the total cost per unit of each product line when machine hours are used as the cost driver for overhead allocation?
2. How much overhead is allocated to Jackets when direct labor hours are used as the cost driver for overhead allocation?
3. What is the total cost of Tops when direct labor hours are used as the cost driver for overhead allocation?
4. What is the total cost per unit of Accessories when the number of batches is used as the cost driver for overhead allocation?
5. What is the allocation rate when units are used as the cost driver?
6. If you are the manager of the Jackets product line which cost driver would you prefer? Why?
7. Currently the OH cost are being allocated based on DL hours. If the company decides to use units as the cost driver how would you react if you are the Accessories product line manager?

Answer 1

working notes sale Total materia total Gross profit before Tota Product line Units price per allocation of overheads 81085 74800 163030 169790 488705 materiallabour sales unit cost cost pants ackets tops accessories Tota Total overhead cost to be allocated $321560 4600 2500 9800 18500 35400 73 335800 234600 20115 98 245000 145000 25200 36 352800 156800 32970 12 222000 37000 15210 1155600 573400 93495 allocation of overheads on basis of cost drivers following cost drivers machineLabor hours hours machineLabor Productline Units batches Units batches hours ours pants jackets tops accessories Tota Overhead cost per unit of cost driver (S) 4600 2500 9800 18500 35400 42 26 78 95 241 1640 1730 2600 2250 8220 1341 41785 56040 64156 74553 1400 22709 34691 67676 77833 219889019 104073 101710 122197 845 168047 12675688018 46978 5784 321560 321560 321560 321560 9.08 1334.27 39.12 55.59

answer 1) total cost per unit when machine hours are used as cost drivers Tota tota machineTotal cost Tota cost per unit Product line Units material labour hours cost cost pants jackets tops accessories Tota answer 2) when direct labor hours is used as cost driver for overhead alloaction, $ 77833 overheads is alloacated to iackets answer 3) total cost of tops is 311967 ($31.83 per unit of top) when direct labor hours are used as cost driver of overheads allocation. answer 4) total cost per unit of accessories is $ 9.674 when no. of batches is used as cost driver for overheads allocation answer 5) allocation rate of overhead is S 9.08 per unit when units are used as cost driver. answer 6) as a manager of jackets productI woul d prefer the "labor hours" as a cost driver for allocation of overheads, as in manufacturing of jackets involves labor cost as a cost driving element. answer 7) as a accessories product manager,I wl oppose the policy of allocating overheads on basis of no of units instead of the directlabor hours, as overhead costs will increase by $121069 6.54 per unit]) 4600 234600 20115 64156 318871 2500 145000 2520067676 237876 9800 156800 32970 101710 291480 18500 37000 15210 88018 140228 35400 573400 93495 321560 988455 69.32 95.15 29.74 7.58