Double Bounce Trampolines produces two models of trampolines for backyard fun. T
ID: 2398261 • Letter: D
Question
Double Bounce Trampolines produces two models of trampolines for backyard fun. The “Original”, and
the recently introduced “Deluxe”. The Deluxe model introduced several safety features that were
intended to scare overly protective parents into upgrading. Since its introduction, the deluxe model has
been increasing in sales, but at the same time, the company’s profits have been declining. The CFO
believes that the company’s traditional costing system may be to blame. Currently, the company uses
direct-labour hours as the basis for applying overhead. The company estimates that it will incur
$600,000 in overhead costs in the next year.
The following cost data is known:
Original Deluxe
Direct Materials $50 $75
Direct Labour ($10 per hour) 20 hours 30 hours
Number of units produced 7,000 units 2,000 units
The CFO wishes to explore an activity-based costing system
Activity (Cost Driver) Estimated MOH Expected Activity
Total Standard Deluxe
Assembly (Labour Hours) $100,000 20,000 14,000 6,000
Receiving (Receiving Reports) 200,000 4,000 2,000 2,000
Testing (Number of Tests) 300,000 1,000 200 800
$600,000
Required:
a.) Under the traditional costing method:
i. Compute the predetermined overhead rate.
ii. Determine the unit cost of each product.
b.) Under activity based costing:
i. Compute the activity rates for each activity.
ii. Determine the expected unit cost of each product.
c.) Compare and comment on your answers from parts a.) and b.) above.
d.) If ABC produces more accurate cost data, why is it not more widely used?
Explanation / Answer
(a) Traditional Costing :-
(i) Predetermined overhead rate:-
Total Overhead/Total Direct Labour Hrs
Total O/H = $600000
Total Labour hrs = (7000 units * 20 hrs) + (2000 units * 30 hrs) = 200000 hrs
O/H rate = 600000/20000 = $ 30
(ii)
Original
Deluxe
Direct Material
50
75
Direct Labour
20
30
O/H
(30 * 2)
=60
(30 * 3)
=90
Unit cost
130
195
(b) Activity Based Costing :-
(i)Activity Rates for each activity :-
Activity
Cost Driver
Estimated MOH
Expected Activity
Cost/Activity
Assembly
Labour Hrs
100000
20000
5
Receiving
Receiving Reports
200000
4000
50
Testing
No of Tests
300000
1000
300
(ii)
Original
Deluxe
Direct Material
50
75
Direct Labour
20
30
O/H:-
Assembly
(5 * 14000)/7000
=10
(5 * 6000)/2000
=15
Receiving
(50 * 2000)/7000
=14.28
(50 * 2000)/2000
=50
Testing
(300 * 200)/7000
=8.57
(300 * 800)/2000
=120
Unit cost
102.85
290
In the detail of cost:
Direct Labour ($10 per hour) 20 hours 30 hours
I think instead of 20 & 30 Hours, it is $ 20 & $ 30
In other words, Direct Labour hrs = 2 & 3
Total Direct Labour hrs = (7000 units * 2 hrs) + (2000 units * 3 hrs) = 20000 hrs
In ABC cost driver total Direct Labour hrs also given = 20000 hrs
Original
Deluxe
Direct Material
50
75
Direct Labour
20
30
O/H
(30 * 2)
=60
(30 * 3)
=90
Unit cost
130
195
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