For many years, Sinclair Graphic Design has provided design and digital-printing
ID: 2493643 • Letter: F
Question
For many years, Sinclair Graphic Design has provided design and digital-printing services for indoor banners. The nylon banners, which come in a standard size, are used for a variety of purposes, including trade shows, sporting events, and other promotional activities. Three years ago, the company introduced a second printing and production service for outdoor banners that have become increasingly popular. The outdoor banners are a more complex product than the indoor banners, requiring weatherproof vinyl materials and a different printing process to improve the visibility of the text and graphics content. Moreover, outdoor banners are printed in smaller production runs because of less frequent orders; the setup of the printing equipment takes longer; and, since higher durability is needed to withstand the elements, more quality inspections are needed. Under the traditional costing approach, overhead costs are assigned to the products on the basis of direct labour-hours.
Despite the introduction of the new outdoor banners, profits have declined steadily over the past three years. Management is beginning to believe that the company’s costing system may be at fault. Unit costs for materials and labour for the two products follow:
Management estimates that the company will incur $1,920,000 in overhead costs during the current year and that 32,000 indoor banners and 6,400 outdoor banners will be produced and sold.
Compute the predetermined overhead rate assuming that the company continues to apply overhead cost to products on the basis of direct labour-hours. (Round your answer to 2 decimal places.)
Using this rate and other data from the problem, determine the unit product cost of each product.(Round your answers to 2 decimal places.)
Management is considering using ABC to apply manufacturing overhead costs to products for external financial reports. Some preliminary work has been done, and the data that have been collected are displayed below. Using these data, calculate the predetermined overhead rate for each activity cost pool identified below. (Round your answers to 2 decimal places.)
Using the predetermined manufacturing overhead rates that you computed in (2) above, do the following:
Determine the total amount of manufacturing overhead cost that would be applied to each product using the ABC system. After these totals have been computed, determine the amount of overhead cost per unit of each product.
Compute the unit product cost of each product. (Round your answers to 2 decimal places.)
For many years, Sinclair Graphic Design has provided design and digital-printing services for indoor banners. The nylon banners, which come in a standard size, are used for a variety of purposes, including trade shows, sporting events, and other promotional activities. Three years ago, the company introduced a second printing and production service for outdoor banners that have become increasingly popular. The outdoor banners are a more complex product than the indoor banners, requiring weatherproof vinyl materials and a different printing process to improve the visibility of the text and graphics content. Moreover, outdoor banners are printed in smaller production runs because of less frequent orders; the setup of the printing equipment takes longer; and, since higher durability is needed to withstand the elements, more quality inspections are needed. Under the traditional costing approach, overhead costs are assigned to the products on the basis of direct labour-hours.
Despite the introduction of the new outdoor banners, profits have declined steadily over the past three years. Management is beginning to believe that the company’s costing system may be at fault. Unit costs for materials and labour for the two products follow:
Explanation / Answer
Requirement 1-a:
Computation of Predetermined Overhead Rate on the basis of Direct Labor Hours:
Number of Direct Labor Hours:
Particulars
Indoor Banners
Outdoor Banners
Direct Labor per Unit
$11
$33
Direct Labor per Hour
$11
$11
Labor Hours per unit
1 hour (11 / 11)
3 hours (33 / 11)
Units Produced and Sold
32000
6400
Total Labor Hours
32000
19200
Total Labor Hours = 32000 + 19200 = 51200
Predetermined Overhead Rate = Overhead Costs / Total Labor Hours
= 1920000 / 51200
= $37.5 per Labor Hour
Predetermined Overhead Rate per labor hour = $37.5
Requirement 1-b:
Calculation of Unit Product Cost:
Particulars
Indoor Banners
Outdoor Banners
Direct Material
$10.50
$27.80
Direct Labor
$11
$33
Overhead cost
$37.5 (37.5 * 1)
$112.5 (37.5 * 3)
Unit Product Cost
$59
$173.3
Requirement 2:
Calculation of Predetermined Overhead Rate for each Activity Cost Pool:
Activity
Total Overhead Cost
Activity Measure
Cost per activity measure
Order Processing
480000
1600
$300 (480000 / 1600)
Print Setup
160000
1600
$100 (160000 / 1600)
Artwork and Graphic Design
1120000
22400
$50 (1120000 / 22400)
Quality Control
160000
1280
$125 (160000 / 1280)
Total Overhead Cost
1920000
Requirement 3-a:
Calculation of total manufacturing overhead costs to each product and overhead cost per unit of each product:
Total Manufacturing Overhead Cost:
Activity
Total Cost
Indoor Banners
Outdoor Banners
Order Processing
$480000
$240000 (300 *800)
$240000 (300 * 80)
Print Setup
$160000
$128000 (100 * 1280)
$32000 (100 * 320)
Artwork and Graphic Design
$1120000
$560000 (50 * 11200)
$560000 (50 * 11200)
Quality Control
$160000
$80000(125 * 640)
$80000 (125 * 640)
Total Overhead Cost
$1920000
$1008000
$912000
Units Produced and Sold
38400
32000
6400
Overhead Cost per unit
$31.5 (1008000 / 32000)
$142.5 (912000 / 6400)
Requirement 2-b:
Computation of Unit Product Cost:
Particulars
Indoor Banners
Outdoor Banners
Direct Material
$10.50
$27.80
Direct Labor
$11
$33
Overhead cost
$31.5
$142.5
Unit Product Cost
$53
$203.3
Particulars
Indoor Banners
Outdoor Banners
Direct Labor per Unit
$11
$33
Direct Labor per Hour
$11
$11
Labor Hours per unit
1 hour (11 / 11)
3 hours (33 / 11)
Units Produced and Sold
32000
6400
Total Labor Hours
32000
19200
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