5.1 S alem makes two products and expects to incur the following overhead costs

Question

5.1 S alem makes two products and expects to incur the following overhead costs next year: Machining Setup Packaging Total Overhead Costs $150,000 $70,000 $50,000 530,000 Salem expects the following next year: Prod Prod 2 Machining hours4,000 Number of setups Units Direct Labor Direct Materials 1,000 10 30 7,0003,000 $70,000 $30,000 $40,000 $50,000 a. What is the PDO assuming a single plant-wide rate based on direct labor cost? b. Using traditional method, how much overhead is assigned products 1? Product2? c. Using traditional method, what is the total cost of product 1? Product 2? d. If sales are $300,000 for prod 1 & $150,000 for product 2, what is the gross profit per unit using the single plant-wide rate? e. Use activity based costing to come up with ABC rates. f. Using ABC, how much overhead is assigned to product 1? Product 2? g. Using ABC, what is the total product cost of product 1? Product 2? h. If sales are $300,000 for prod 1 &$150,000 for prod 2, what is the gross profit per unit using ABC?

Explanation / Answer

Answer a. Predetermined Overhead Rate = $150,000 (Total Overhead) / $100,000 (Direct Labor Cost) Predetermined Overhead Rate = 150% of Direct Labor Cost Answer b. Product 1 Product 2 Direct Labor                 70,000.00              30,000.00 Overhead Applied - 150% of DL               105,000.00              45,000.00 Answer c. Product 1 Product 2 Direct Labor                 70,000.00              30,000.00 Direct Materials                 40,000.00              50,000.00 Overhead               105,000.00              45,000.00 Total Cost               215,000.00            125,000.00 Answer d. Product 1 Product 2 Sales               300,000.00            150,000.00 Total Cost               215,000.00            125,000.00 Gross Profit                 85,000.00              25,000.00 No. of Units Sold                   7,000.00                3,000.00 Gross Profit per Unit                         12.14                         8.33 Answer e. Calculation of Overhead Rate Under ABC Method Activity Cost Pool Estimated Overhead Expected use of Cost Drivers Activity-Based Overhead rate Machining                       70,000                      5,000 Mach. Hrs            14.00 per mach. Hr Setup                       50,000                            40 setups      1,250.00 per setup Packaging                       30,000                    10,000 units               3.00 per unit Total                     150,000 Answer f. Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Product 1 Product 2 Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Machining                         14.00 per mach. Hr              4,000 Mach. Hrs                 56,000.00         1,000 Mach. Hrs        14,000.00 Setup                   1,250.00 per setup                    30 setups                 37,500.00               10 setups        12,500.00 Packaging                            3.00 per unit              7,000 units                 21,000.00         3,000 units           9,000.00 Total              114,500.00        35,500.00 Answer g. Product 1 Product 2 Direct Labor                 70,000.00              30,000.00 Direct Materials                 40,000.00              50,000.00 Overhead               114,500.00              35,500.00 Total Cost               224,500.00            115,500.00 Answer h. Product 1 Product 2 Sales               300,000.00            150,000.00 Total Cost               224,500.00            115,500.00 Gross Profit                 75,500.00              34,500.00 No. of Units Sold                   7,000.00                3,000.00 Gross Profit per Unit                         10.79                      11.50

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