Longmire Company produces two products AZ and BZ. It applies manufacturing overh

Question

Longmire Company produces two products AZ and BZ. It applies manufacturing overhead on the basis of direct labour hours. Expected costs (material, labour, and overhead) and unit volumes are: AZ:2,500 units, $250 BZ: 4,000 units,$300 Longmire's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $75,075. The company believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: AZ:15 purchase orders;BZ:50 purchase orders. Longmire's selling prices are based heavily on cost. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained (5 marks) Calculate the pool rate for purchase order processing (3 marks) Calculate the purchase-order processing cost to be charged to one unit of AZ (4 marks) Assume that Longmire switched to activity-based costing and calculated total unit production costs as follows:AZ: $290; BZ:$225. Which of the two products was over costed prior to the change to ABC? (3 marks) Which of the two products may be been less competitive in the marketplace prior to the change to ABC? Briefly explain.

Explanation / Answer

Required 1: Activity based costing (ABC) is always result in improving costing accuracy than the traditional costing procedures of direct labor hours because each and every activity of the production is not directly proportional to the direct labor hours. Like in the concerned purchase order processing activities more accurate distribution/absorption of costs could be possible through 'number of purchase order for each product' instead of 'direct labor hours'. So, absorption of costs on the basis of ABC will provide more accurate costing of the expenses.

Required 2:the pool rate of purchase order processing = $75075/65 = $1155 per purchase order

Required 3: The purchase order processing costs charged to per unit of AZ = 1155 * 15 /2500 = $6.93 per unit

Required 4: (a) Product BZ was overcosted prior to the change to ABC of the two products as prior its cost of production was $300 and after adopting ABC its cost of production reduced to $225 per unit.

(b) Prior Product BZ was less competitive in the marketplace because of the higher costing and being high absorption of overhead costs making it more expensive in the market.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.