At its manufacturing plant in Duluth, Minesota, EndoElectronics Company Manufact
ID: 2433839 • Letter: A
Question
At its manufacturing plant in Duluth, Minesota, EndoElectronics Company Manufactures two products, X21 and Y37. Formany years, the company has used a simple plantwide manufacturingsupport cost rate based on direct labor hours. A new plantAccountant suggested that the company may be able to assign supportcosts to products more accurately by using an activity basedcosting system that relies on a separate rate for eachmanufacturing activity that causes support costs. The plantaccountant has collected the following data for last year: Items: ProductX21 Product Y37 Units produced and sold50,000 .Units produced and Sold:100,000 Direct labor hours used100,000 Directlabor hours used: 300,000 Direct labor cost1,000,000 Direct labor cost: 4,500,000 Number of times handled40,000 Number of times handled: 20,000 Number of parts12,000 Number of parts: 8,000 Number of design changes2,000 Number of design changes: 1,000 Number of product setups8,000 Number of product setups: 6,000 The account has also determined the actual manufacturingsupport costs incurred last year: Costpool: Activity Costs Handling 3,000,000 Number ofparts 2,400,000 DesignChanges 3,300,000 Setups 2,800,000 Total 11,500,000 The direct materials cost for product X21 is $120 per unit andY37 is $140 per unit. A: Determine the unit cost of each product using direct laborhours to allocate all manufacturing support costs. B: Determine the unit cost of each product using activitybased costing C: Which of the two methods produces more accurate estimatesof job costs. Explain At its manufacturing plant in Duluth, Minesota, EndoElectronics Company Manufactures two products, X21 and Y37. Formany years, the company has used a simple plantwide manufacturingsupport cost rate based on direct labor hours. A new plantAccountant suggested that the company may be able to assign supportcosts to products more accurately by using an activity basedcosting system that relies on a separate rate for eachmanufacturing activity that causes support costs. The plantaccountant has collected the following data for last year: Items: ProductX21 Product Y37 Units produced and sold50,000 .Units produced and Sold:100,000 Direct labor hours used100,000 Directlabor hours used: 300,000 Direct labor cost1,000,000 Direct labor cost: 4,500,000 Number of times handled40,000 Number of times handled: 20,000 Number of parts12,000 Number of parts: 8,000 Number of design changes2,000 Number of design changes: 1,000 Number of product setups8,000 Number of product setups: 6,000 The account has also determined the actual manufacturingsupport costs incurred last year: Costpool: Activity Costs Handling 3,000,000 Number ofparts 2,400,000 DesignChanges 3,300,000 Setups 2,800,000 Total 11,500,000 The direct materials cost for product X21 is $120 per unit andY37 is $140 per unit. A: Determine the unit cost of each product using direct laborhours to allocate all manufacturing support costs. B: Determine the unit cost of each product using activitybased costing C: Which of the two methods produces more accurate estimatesof job costs. ExplainExplanation / Answer
A. Determine the unit cost of each product using directlabor hours to allocate all manufacturingsupport costs Manufacturing support costdriver rate = $11,500,000/ (100,000 DLH + 300,000DLH) = $28.75 per DLH Cost per unit Details Product X21 Product Y37 Direct material $120 $140 Direct labor 2 x $10 $20 3 x $15 $45 Manufacturing support cost $28.75 x (100,000 x 50,000) $57.50 $28.75 x (300,000 x 100,000) $86.25 Total Unit Cost $197.50 $271.25 Cost per unit Details Product X21 Product Y37 Direct material $120 $140 Direct labor 2 x $10 $20 3 x $15 $45 Manufacturing support cost $28.75 x (100,000 x 50,000) $57.50 $28.75 x (300,000 x 100,000) $86.25 Total Unit Cost $197.50 $271.25 B: Determine the unit cost of each product using activitybased costing Activity Driver Qty Activity Cost Cost Driver Rate Cost Allocated Product X21 Product X21 Handling 60,000 $3,000,000 $50 50 x 40,000 = $2,000,000 50 x 20,000 = $1,000,000 Number of parts 20,000 $2,400,000 $120 $120 x 12,000 = $1,440,000 $120 x 8,000 = $960,000 Design Changes 3,000 $3,300,000 $1,100 $1,100 x 2,000 = $2,200,000 $1,100 x 1,000 = $1,100,000 Setups 14,000 $2,800,000 $200 $200 x 8,000 = $1,600,000 $200 x 6,000 = $1,20,000 Total $11,500,000 $7,240,000 $4,260,000 _________________________________________________________________________ Cost per unit Details Product X21 Product X21 DM $120 $140 DL 2 x $10 $20 3 x$15 $45 Manufacturing support cost $7,240,000 / 50,000 $144.80 $4,260,000 / 100,000 $42.60 Total Unit Cost $284.80 $227.60 Cost per unit Details Product X21 Product X21 DM $120 $140 DL 2 x $10 $20 3 x$15 $45 Manufacturing support cost $7,240,000 / 50,000 $144.80 $4,260,000 / 100,000 $42.60 Total Unit Cost $284.80 $227.60 __________________________________________________________________________
C: Which of the two methods produces more accurate estimatesof job costs. Explain
Activity-based costing produces more accurate estimates of jobcosts because it takes into account the respective cost driversthat provides comparatively more accurate allocation of supportcosts. Cost per unit Details Product X21 Product Y37 Direct material $120 $140 Direct labor 2 x $10 $20 3 x $15 $45 Manufacturing support cost $28.75 x (100,000 x 50,000) $57.50 $28.75 x (300,000 x 100,000) $86.25 Total Unit Cost $197.50 $271.25
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