Koontz Company manufactures two models of industrial components—a Basic model an
ID: 2529990 • Letter: K
Question
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz’s controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):
Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:
Required:
1. Using the plantwide approach:
a. Calculate the plantwide overhead rate.
b. Calculate the amount of overhead that would be assigned to each product.
2. Using a departmental approach:
a. Calculate the departmental overhead rates.
b. Calculate the total amount of overhead that would be assigned to each product.
c. Using your departmental overhead cost allocations, redo the controller’s segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).
3. Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to five activity cost pools as follows:
She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the company’s selling and administrative costs are organization-sustaining in nature.
Using the additional information provided by the production manager, calculate:
a. An activity rate for each activity cost pool.
b. The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach.
c. The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.
4. Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 7-8. (Hint: Organize all of the company’s costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)
5. Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.
Basic Advanced Total Number of units produced and sold 20,000 10,000 30,000 Sales $ 3,000,000 $ 2,000,000 $ 5,000,000 Cost of goods sold 2,300,000 1,350,000 3,650,000 Gross margin 700,000 650,000 1,350,000 Selling and administrative expenses 720,000 480,000 1,200,000 Net operating income (loss) $ (20,000 ) $ 170,000 $ 150,000Explanation / Answer
Requirement 1 Plantwide Approach a Plantwide overhead rate = Total overhead/Total direct labor hours = 1350000/45000 = 30 b Assignment of overhead to each product Basic Advanced Total Total Labor hours consumed by each product 30000 15000 45000 Multiply by Plantwide overhead rate 30 30 Total overhead assigned 900000 450000 1350000 Requirment 2 Departmental approach a Moulding department overhead rate = Total overhead in Moulding department/Total Machine hours in moulding department = 787500/22000 = 35.79545 Assembly department overhead rate = Total overhead in Assembly department/Total labor hour in assembly department = 562500/30000 = 18.75 b Assignment of overhead to each product Basic Advanced Total Total Machine hours in Moulding department consumed by each product 12000 10000 22000 Multiply by overhead rate as calculated above 35.79545 35.79545 Total overhead of moulding department 429545.5 357954.5 787500 Total Direct labor in assembly department consumed by each product 20000 10000 30000 Multiply by overhead rate as calculated above 18.75 18.75 Total overhead of Assembly department 375000 187500 562500 Total Overhead allocated to products 804545.5 545454.5 1350000 c Controller's segmented Income Statement using departmental overhead cost allocation Basic Advanced Total Number of units produced & sold 20000 10000 30000 Sales 3000000 2000000 5000000 Cost of goods sold Direct Material 800000 600000 1400000 Direct labor 600000 300000 900000 Manufacturing overhead 804545.5 545454.5 1350000 Total cost of goods sold 2204545 1445455 3650000 Gross margin 795454.5 554545.5 1350000 Selling & adminstrative expenses 720000 480000 1200000 Net operating Income 75454.55 74545.45 150000 Requirement 3 Requirement a Activity cost pool Activity measure Total cost driver quantity Total overhead amount Basic Advanced Machining Machine hours in moulding 22000 12000 10000 Amount allocated 417500 227727.3 189772.7 Assemble and pack Direct labor hours in assembly and packing 30000 20000 10000 Amount allocated 282500 188333.3 94166.67 Order processing Number of customer orders 250 50 200 Amount allocated 230000 46000 184000 Setups Setup hours 650 50 600 Amount allocated 340000 26153.85 313846.2 Requirment b Total manufacturing overhead cost allocated to 1270000 488214.5 781785.5 Requirement c Total selling & administrative cost traced to Sales commissions 150000 200000 Fixed advertising costs 150000 200000 Total 300000 400000 Requirement 4 Contribution format Income statement using activity based costing Basic Advanced Total Number of units produced & sold 20000 10000 30000 Sales 3000000 2000000 5000000 Variable costs Direct Material 800000 600000 1400000 Direct labor 600000 300000 900000 Selling commission 150000 200000 350000 Total variable costs 1550000 1100000 2650000 Contribution margin 1450000 900000 2350000 Contribution ratio 48.33333 45 Traceble fixed cost Manufacturing overhead 488214.5 781785.5 1270000 Advertising cost 150000 200000 350000 Total traceble fixed cost 638214.5 981785.5 1620000 Common fixed costs Manufacturing overhead-other for unused capacity 80000 Selling & adminstrative expenses 500000 Net operating Income 811785.5 -81785.5 150000 Requirement 5 Breakeven point in dollars for advanced model =total fixed cost / Contribution ratio =981785.5/45% 2181745.556 OR =(total fixed cost / Contribution per unit)*Sales price =(981785.5/90)*200 2181745.556
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