7-29 Calculating activity-based product costs; activity-based management (CMA ad
ID: 2338967 • Letter: 7
Question
7-29 Calculating activity-based product costs; activity-based management (CMA adapted) (LO 2, 3, 5) Highland Manufacturing produces two products in its Saratoga plant, balzene and galvene. Since it opened its doors in 1965, Highland has been using a single manufacturing overhead pool to accumulate overhead costs. Overhead has been allocated to products based on direct labor hours Until recently, Highland was the sole producer of galvene in the country and was there- fore able to dictate the selling price. However, last year Marcella Products began marketing a comparable product at $37 per unit-a price that is below Highland's product cost. High- land's market share of galvene has declined rapidly as a result. The company's managers must now decide whether to meet the competitive price or discontinue the product. High- land's cost accountant has suggested that the company do an activity-based cost analysis before managers make the decision. The two main indirect costs of manufacturing balzene and galvene are power usage and setup costs. Most of the power usage occurs in the fabricating department; most of the setup costs are incurred in the assembly the production of balzene. The fabricating department has identified machine hours as the appropriate cost driver; the assembly department has identified setups as the appropriate cost driver. Direct labor rates are the same in both departments. department. Setup costs are incurred predominantly in The combined budget for manufacturing is as follows. Total Number of units Direct labor Direct material Overhead Balzene 20,000 2 hours per unit $5 per unit Galvene 20,000 3 hours per unit 3 per unit $800,000 Indirect labor Fringe benefits Indirect materials Power Setup Quality assurance Other utilities Depreciation $ 24,000 5,000 31,000 180,000 75,000 10,000 10,000 15,000Explanation / Answer
Solution:
Part a – Calculation of Unit Cost
Balzene
Galvene
Direct materials
$5.00
$3.00
Direct Labors
(Refer Note 2 – Rate per Hour is $8)
$16.00
(2*8)
$24.00
(3*8)
Applied Manufacturing Overhead
(Refer Note 1, 2 & 3)
$7.00
(3.5*2)
$10.50
(3.5*3)
Total Manufacturing Costs
$28.00
$37.50
Part b – amount of overhead cost assigned
Total
Fabricating
Assembly
Indirect labor
$24,000
$18,000
$6,000
Fringe benefits
$5,000
$3,000
$2,000
Indirect materials
$31,000
$20,000
$11,000
Power
$180,000
$160,000
$20,000
Setup
$75,000
$5,000
$70,000
Quality assurance
$10,000
$7,000
$3,000
Other utilities
$10,000
$5,000
$5,000
Depreciation
$15,000
$12,000
$3,000
Total Overhead Costs
$350,000
$230,000
$120,000
Number of Units
20,000
20,000
Overhead Rate per Unit
$11.50
$6.00
Part c – Unit Cost using activity based costing
Balzene
Galvene
Direct materials
$5.00
$3.00
Direct Labors
$16.00
$24.00
Applied Manufacturing Overhead
$11.50
$6.00
Total Manufacturing Costs
$32.50
$33.00
Part D – Yes, the company should switch to activity based costing because it provides the absolute figure with respect to the costs of product.
Note 1 – Total Overhead Cost
Total Overhead Costs
$$
Indirect labor
$24,000
Fringe benefits
$5,000
Indirect materials
$31,000
Power
$180,000
Setup
$75,000
Quality assurance
$10,000
Other utilities
$10,000
Depreciation
$15,000
Total Overhead Costs
$350,000
Note 2 – Estimated Total Direct Labor Hours
Balzene
Galvene
Total
Number of Units
20,000
20,000
Required Direct Labor Hours Per Unit
2
3
Required Total Direct Labor Hours
40000
60000
100000
Total Direct Labor Cost
$800,000
Rate Per Hour ($800,000 / 100,000)
$8 per hour
Note 3 –
Overhead Allocation Rate = Estimated Total Overhead Cost $350,000 / Estimated Total Direct Labor Hours 100,000
= $3.50 per DLH
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Balzene
Galvene
Direct materials
$5.00
$3.00
Direct Labors
(Refer Note 2 – Rate per Hour is $8)
$16.00
(2*8)
$24.00
(3*8)
Applied Manufacturing Overhead
(Refer Note 1, 2 & 3)
$7.00
(3.5*2)
$10.50
(3.5*3)
Total Manufacturing Costs
$28.00
$37.50
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