Problem (1 The following information has been obtained from a manufacturing comp
ID: 2520364 • Letter: P
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Problem (1 The following information has been obtained from a manufacturing company records. ?his company has different departments whose costs are distributed across two different activities as shown below Activities costs Maintenance Quality inspection Total overheads $40,000 $50,000 $90,000 l'he company has the following activities measures Activities Machine maintenance Quality inspection Activity measures (i.e. drivers Machine hours No: of quality inspection The company produces two products. The following information pertains to products* costs and consumption of activities Products Number of unitsMachine hours | No. of quality inspectiorn roduced 20,000 30,000 15,000 5,000 6,000 4,000 The company uses a traditional system in which it distributes (i.e. allocate) overheads to different products according to number of direct labor hours. Required a) Calculate the perunit overhead costs using the traditional system, If you know that a unit of A requires 1.8 direct labor hours while a ut of B requires 1.3 direct labor hours b) Re-calculate the per unit overhead costs using ABC systemExplanation / Answer
Given info –
Product A requires 1.8 direct labor hours per unit
Product B requires 1.3 direct labor hours per unit
Per unit overhead cost
Product A
$2.16
Product B
$1.56
Computations -
Units
DLH per unit
Total DLH
Product A
20,000
1.8
36,000
Product B
30,000
1.3
39,000
Total DLH
75,000
Total overheads
$90,000
Predetermined overhead per DLH
$90,000/75,000
$1.20 per DLH
Per unit overhead cost –
Product A = 1.8 DLH x $1.20 = $2.16 per unit
Product B = 1.3 DLH x $1.20 = $1.56 per unit
Note: DLH refers to direct labor hours
Overhead cost per unit
Product A
$3 per unit
Product B
$1 per unit
Computations –
Activity
Cost Driver
Estimated Cost
Usage
Activity rate per cost driver
Machine Maintenance
Machine Hours
$40,000
20,000 MH
$2 per MH
Quality Inspection
No. of quality inspections
$50,000
10,000 inspections
$5 per inspection
Product A
Activity
Usage
Activity Rate
Total Cost
Machine Maintenance
15,000 MH
$2 per MH
$30,000
Quality Inspection
6,000 inspections
$5 per inspection
$30,000
Total overhead assigned
$60,000
Number of units
20,000
overhead cost per unit
60,000/20,000
$3 per unit
Product B
Activity
Usage
Activity Rate
Total Cost
Machine Maintenance
5,000 MH
$2 per MH
$10,000
Quality Inspection
4,000 inspections
$5 per inspection
$20,000
Total overhead assigned
$30,000
Number of units
30,000
overhead cost per unit
$30,000/30,000
$1 per unit
Per unit overhead cost
Product A
$2.16
Product B
$1.56
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