Slacker Slacks Inc. (SSI) is a high-end clothing manufacturer. SSI makes Slacks®
ID: 2334580 • Letter: S
Question
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?
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
Explanation / Answer
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.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.