BCH Corporation produces and sells two types of sofa pillows: plain and fancy. C

Question

BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labour hours as the allocation base. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production:

Direct costs for a plain sofa pillow are $2 for material and $4 for direct labour (20 minutes @ $12.00 per hour). Direct costs for a fancy sofa pillow are $2.50 for material and $6.00 for direct labour (30 minutes @ $12.00 per hour). In 20x4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 10 setups for fancy pillows and 5 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.

a) Calculate the cost per unit for each type of pillow under traditional costing.
b) Calculate the cost per unit for each type of pillow under ABC.

Estimated Costs Actual Costs Activity Material cutting Sewing machine setups Number of setups Factory maintenance Number of direct labour hours_15,000 Driver Number of cuts for 20x4 $16,000 27,000 for 20x3 $13,665 24,800 $58.000

Explanation / Answer

Req 1: Total Labour hours: Plain Pillow (10000/3): 3333.33 Fancy Pillow (8000/2) 4000 Total DLH 7333.33 Factory OH rate: Estimated OH/ DLH =58000/7333.33 = $ 7.91 per DLH OH cost per unit: Plain Fancy DLH 3333.333 4000 OH rate 7.91 7.91 Total OH cost 26366.66 31640 Number of units 10000 8000 OH cost per unit 2.637 3.955 Unit Product Cost Plain Fancy Material cost 2 2.5 Labour coost 4 6 OH cost 2.637 3.955 Units product cost 8.637 12.455 Req 2: STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Material Curting Cuts 16000 20000 0.8 Machining Sewing machine setups Setups 27,000 15 1800 Ffactory Maintenance DLH 15,000 7,333 2.045 OH assigned: Plaain Fancy Mmaterial c utting@0.80 pe cut 8000 8000 Machining @1800 per setup 9000 18000 Maintenance (@ 2.045) 6816.66 8180 Total OH cost 23817 34180 Divide numbe of unit 10000 8000 OH cost per unti 2.3817 4.2725 Unit Product Cost Plain Fancy Material cost 2 2.5 Labour coost 4 6 OH cost 2.637 3.955 Units product cost 8.634 12.455

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