Question

b) Electric Car Co (ECC). currently manufactures two different types of fully electronic cars in 2021. Type 8Y is a large SUV whereas Type 8W will be the fastest car in the world with 10 rocket thrusters. ECC has decided to use ABC costing instead of traditional costing. The 2021 budget to manufacture these new types include manufacturing overhead of $126,920,760 which has been allocated on each product’s inspection hours. The expected prime costs of two new types are as follows: Type 8Y Type 8W Prime Costs $20,915 $43,625 ECC’s controller believes the traditional costing system may be providing misleading cost information. They have developed an analysis of the 2021 budgeted manufacturing-overhead costs shown in the following chart. Activity Cost Driver Budgeted Activity Budgeted Cost Assembly Assembly hours 10,000 $63,460,000 Inspection Inspection hours 10,000 $27,920,000 Painting Gallons of paint 5,000 $22,850,000 Quality control Number of tests 8,000 $12,690,760 Total manufacturing-overhead cost $126,920,760 Actual data regarding the 2021 manufacturing of the Type 8Y and the Type 8W is shown in the following table with a total MOH of $216,920,760: Type 8Y Type 8W Budgeted Sales (units) 2,222 555 Assembly hours 767 2,955 Inspection hours 767 2,955 Paint Gallons 383 1477 Tests 612 2364 Required: 1) Using the traditional method i. Determine the company’s predetermined overhead rate(s) applied ii. Determine how much overhead was applied to Type 8Y iii. Provide the MOH true up journal entry required for this method at the end of the year 2) Using the ABC method i. Determine the company’s predetermined overhead rate(s) applied ii. Determine how much overhead was applied to Type 8Y iii. Provide the MOH true up journal entry required for this method at the end of the year

Answer 1

Answer-1(i):

Company’s predetermined overhead rate(s) = Budgeted manufacturing overhead cost / Inspection hours

= $126,920,760 / 10,000 = $12,692.076

Answer-1(ii):

Overhead applied to Type 8Y = 767 × $12,692.076 = $9,734,822

Answer-1(iii):

WIP-Type 8Y	$             97,34,822
Manufacturing overhead		$      97,34,822

Answer-2(i):

Activity	Cost driver	Budgeted Activity	Budgeted cost	Overhead rate
Assembly	Assembly hours	10000	$      6,34,60,000	$                6,346
Inspection	Inspection hours	10000	2,79,20,000	2,792
Painting	Gallons of paint	5000	2,28,50,000	4,570
Quality control	No. of tests	8000	1,26,90,760	1,586
		Total	$    12,69,20,760

Answer-2(ii):

Overhead applied to Type 8Y:
Activity	Activity used	Overhead rate	Cost
Assembly	767	$              6,346	$          48,67,382
Inspection	767	2,792	21,41,464
Painting	383	4,570	17,50,310
Quality control	612	1,586	9,70,843
Total	$          97,29,999

Answer-2(iii):

WIP-Type 8Y	$             97,29,999
Manufacturing overhead		$      97,29,999

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