Lift Jack Company has seven activity cost pools and two products. It expects to
ID: 2471664 • Letter: L
Question
Lift Jack Company has seven activity cost pools and two products. It expects to Products 200.000 units of its automobile scissors, jack and 80.000 units of truck hydraulic jack. Having identified its activity cost pools and the cost drivers for each cost Pool. Lift jack company accumulated the following data relative to those activity cost pools and cost drivers. Traditionally the manufactural overhead cost has been applied to work in process based on Direct Labor hours. Under the traditional method what is the overhead rate per direct labor hour and how much overhead is applied to each scissors jack and hydraulic jack. Prepare a schedule showing the computations of the activity-based overhead rates per cost driver under ABC Prepare a schedule assigning each activity's overhead cost to the two products using ABC. Compute the overhead cost per unit for each product using ABC ? Comment on the comparative overhead cost per unit.Explanation / Answer
1
Calculation of overhead allocation using traditional method:
Total manufacturing overhead (A)
$ 6,800,000
Total Direct labor hours (B)
200,000
Hours
Overhead allocation rate = A/B =
$ 34.00
Per Direct Labor Hour
Allocation of Overhead to products:
Scissors Jacks
Hydraulic Jacks
Total Direct labor hours (A)
130000
70000
Overhead allocation rate (B)
$ 34.00
$ 34.00
Allocation of Overhead = A*B =
$ 4,420,000
$ 2,380,000
2
Calculation of Activity Based Overhead Rates:
Activity Cost Pools
Estimated Overhead
Total Activity
Overhead Rate
A
B
A/B
Ordering and Receiving
$ 200,000
2,500
$ 80.00
Machine Setup
$ 600,000
1,200
$ 500.00
Machining
$ 2,000,000
800,000
$ 2.50
Assembling
$ 1,800,000
3,000,000
$ 0.60
Inspecting and testing
$ 700,000
35,000
$ 20.00
Painting
$ 300,000
3,000,000
$ 0.10
Supervising
$ 1,200,000
200,000
$ 6.00
3
Assignment of Overhead cost to products using ABC :
For Scissors Jacks :
Activity Cost Pools
Total Activity
Overhead Rate
Assigned Overhead
A
B
A*B
Ordering and Receiving
1,000
$ 80.00
$ 80,000.00
Machine Setup
500
$ 500.00
$ 250,000.00
Machining
300,000
$ 2.50
$ 750,000.00
Assembling
1,800,000
$ 0.60
$ 1,080,000.00
Inspecting and testing
20,000
$ 20.00
$ 400,000.00
Painting
1,800,000
$ 0.10
$ 180,000.00
Supervising
130,000
$ 6.00
$ 780,000.00
Total Overhead Assigned
$ 3,520,000.00
For Hydraulic Jacks :
Activity Cost Pools
Total Activity
Overhead Rate
Assigned Overhead
A
B
A*B
Ordering and Receiving
1,500
$ 80.00
$ 120,000.00
Machine Setup
700
$ 500.00
$ 350,000.00
Machining
500,000
$ 2.50
$ 1,250,000.00
Assembling
1,200,000
$ 0.60
$ 720,000.00
Inspecting and testing
15,000
$ 20.00
$ 300,000.00
Painting
1,200,000
$ 0.10
$ 120,000.00
Supervising
70,000
$ 6.00
$ 420,000.00
Total Overhead Assigned
$ 3,280,000.00
4
Calculation of Overhead cost per unit:
Scissors Jacks
Hydraulic Jacks
Assigned overhead Costs (A)
$ 3,520,000.00
$ 3,280,000.00
Number of Units (B)
200000
80000
Overhead cost per unit =A/B =
$ 17.60
$ 41.00
1
Calculation of overhead allocation using traditional method:
Total manufacturing overhead (A)
$ 6,800,000
Total Direct labor hours (B)
200,000
Hours
Overhead allocation rate = A/B =
$ 34.00
Per Direct Labor Hour
Allocation of Overhead to products:
Scissors Jacks
Hydraulic Jacks
Total Direct labor hours (A)
130000
70000
Overhead allocation rate (B)
$ 34.00
$ 34.00
Allocation of Overhead = A*B =
$ 4,420,000
$ 2,380,000
2
Calculation of Activity Based Overhead Rates:
Activity Cost Pools
Estimated Overhead
Total Activity
Overhead Rate
A
B
A/B
Ordering and Receiving
$ 200,000
2,500
$ 80.00
Machine Setup
$ 600,000
1,200
$ 500.00
Machining
$ 2,000,000
800,000
$ 2.50
Assembling
$ 1,800,000
3,000,000
$ 0.60
Inspecting and testing
$ 700,000
35,000
$ 20.00
Painting
$ 300,000
3,000,000
$ 0.10
Supervising
$ 1,200,000
200,000
$ 6.00
3
Assignment of Overhead cost to products using ABC :
For Scissors Jacks :
Activity Cost Pools
Total Activity
Overhead Rate
Assigned Overhead
A
B
A*B
Ordering and Receiving
1,000
$ 80.00
$ 80,000.00
Machine Setup
500
$ 500.00
$ 250,000.00
Machining
300,000
$ 2.50
$ 750,000.00
Assembling
1,800,000
$ 0.60
$ 1,080,000.00
Inspecting and testing
20,000
$ 20.00
$ 400,000.00
Painting
1,800,000
$ 0.10
$ 180,000.00
Supervising
130,000
$ 6.00
$ 780,000.00
Total Overhead Assigned
$ 3,520,000.00
For Hydraulic Jacks :
Activity Cost Pools
Total Activity
Overhead Rate
Assigned Overhead
A
B
A*B
Ordering and Receiving
1,500
$ 80.00
$ 120,000.00
Machine Setup
700
$ 500.00
$ 350,000.00
Machining
500,000
$ 2.50
$ 1,250,000.00
Assembling
1,200,000
$ 0.60
$ 720,000.00
Inspecting and testing
15,000
$ 20.00
$ 300,000.00
Painting
1,200,000
$ 0.10
$ 120,000.00
Supervising
70,000
$ 6.00
$ 420,000.00
Total Overhead Assigned
$ 3,280,000.00
4
Calculation of Overhead cost per unit:
Scissors Jacks
Hydraulic Jacks
Assigned overhead Costs (A)
$ 3,520,000.00
$ 3,280,000.00
Number of Units (B)
200000
80000
Overhead cost per unit =A/B =
$ 17.60
$ 41.00
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