ut the . List some ol he puci added activities for $100: and VEE, whach Parvee C
ID: 2492741 • Letter: U
Question
ut the . List some ol he puci added activities for $100: and VEE, whach Parvee Company manufactures two products: PAR, which sells for $100 S200. Estimated cost and production data for the current year are as follow VEE, whch setth data for the current year are as follow EE, 19.28 ed t and ng PAR VEE $25 40 30.000 10,00 variable overhead $20 50 Direct materials cost Direct labor cost (@ $10hr) In addition, fixed manufacturing overhead is estimated to be $2.500,000 and estimated to equal $2.50 per direct labor hour. Parvee desires a 10 pecent retwariable Estimated production (units) esires a 10 percent return on sales for d i to equal $2.50 per direct labor hour. Parvee desires a 10 per entret variable one its products. Instructions a. Calculate the target cost for both PAR and VEE ct if fixed overhead costsae of the products is Estimate the total manufacturing cost per unit of each product if fi assigned to products on the basis of estimated production in units, ead earning the desired return? Recalculate the total manufacturing cost per unit if fixed overhead costs are ucts on the basis of direct labor hours. Which of the products is earningthedesire o (Round to the nearest penny.) uction in units. Which of the b. costs at he desired return assigned to is earning the desired e. decides to perform Perfo d. Given the confusing results of parts b and e. Parvee's production manager decides to an activity analysis of fixed overhead. The results of the analysis are as follows: Demands PAR VEE Costs 350,000 650,000 500,000 300,000 200,000 Driver # of set-ups #Of orders #Of machine-hours # of batches # of shipments Activity Machine set-ups. Purchase orders 100 300 300 100 $ 3,000 4,000 20 Inspection Shipping to customers. 40 400 100 Total fixed overhead $2,000,000 Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. Under this method, which product is earning the desired return? What proportion of fixed overhead is value-added? In attempting to reach the target cost!t VEE, which activity would you look to improving first and why? Parvee's production manager believes that design changes would reduce the number o required for VEE to 75 Fixed overhead costs for set-up would remain unchanged h be the impact of the design changes on the manufacturing costs of both products? the products will earn the desired return? number of set-ups ged. What wil ucts? Which ofExplanation / Answer
a.
b.If fixed overhead is allocated based on units of production, the fixed overhead cost per unit is equal to $ calculated as follows:
Allocation Rate per Unit = Fixed Overhead /Total units of production = $2,500,000/ 30,000 units+10,000 units = $62.5 per unit
Total Manufacturing Cost per Unit is:
Since the cost per unit of PAR is above the target cost of $90, it is not earning the desired 10% return. The cost per unit of VEE is well below the target cost of $180, so it is earning a return greater than the desired rate.
c.Given that it takes 2 hours ($20 total labor cost per unit/$10 per hr. wage rate) to produce each unit of PAR and 5 hours ($50 total labor cost per unit/$10 per hr. wage rate) to produce each unit of VEE, the total expected labor hours needed for the year are:
= 30,000 Units of PAR * 2 hours per unit + 10,000 units of VEE * 5 hours per unit
= 60,000 hours +50,000 hours
=110,000 hours
If fixed overhead is allocated on the basis of direct labor hours, the allocation rate per hour is equal to $22.73 calculated as follows:
Allocation Rate per Unit = Fixed Overhead /Total Direct Labour Hours = $2,500,000/ 110,000 hours = $22.73
Since the cost per unit of PAR is above the target cost of $90, it is not earning a return greater than the desired rate. The cost per unit of VEE is above the target cost of $180, so it is not earning the desired return.
d. The allocation rates of each overhead activity are calculated as follows:
Allocation Rate per Unit of Activity = Overhead Cost/ Total Activity Units
Machiune Setups : Rate per Set ups = $350,000/ 100+300 = $875 per set up
Purchase orders : Rate per order = $650,000/300+100 = $1625 per order
Machining : Rate per Machine hour = $500,000/ 3000+4000 = $71.43 per machine hour
Inspectio Rate per Batch = $300,000/40+20 = $5000 per batch
Shipping : rate per Shipment = $200,000 /400+100 = $400
Since the cost per unit of PAR is below the target cost of $90, it is earning a return greater than the desired rate. The cost per unit of VEE is above the target cost of $180, so it is not earning the desired return.
PAR $ VEE $ Target Price 100 200 Less: Target Profit @ 10%on sales 10 20 Target Cost 90 180Related Questions
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