Babytime, Inc., manufactures two products, Piglets and Rattles. Piglets are the

Question

Babytime, Inc., manufactures two products, Piglets and Rattles. Piglets are the more complex of the two products, requiring more direct labor time and more machine time per unit than Rattles. Manufacturing overhead is currently assigned to the products on the basis of direct labor hours. The company has gathered some activity information and is interested in the differences between its present costing method and activity-based costing. All overhead costs should be allocated to the products. The overhead cost pools and activity drivers are as follows: overhead Costs Activity Pool Total Driver Usage Setup Materials purchasing Machining/fabricating $265,000 116,000 136,000 $517,000 3,700 setups 2,960 purchase orders 27,400 machine hours Total overhead costs Other product information is as follows: Rattles Piglets Number of units produced Direct materials cost Direct labor cost Direct labor hours Setups Purchase orders Machine hours 45,000 $15.00 per unit 10,200 $30.00 per unit $14.00 per unit 21,000 $5.25 per unit 31,000 400 2,280 8,300 3,300 680 19,100

Explanation / Answer

Traditional Costing System Answer 1 Overhead rate per direct labour hour = Total Overhead cost / Total direct labour hours Overhead rate per direct labour hour = $517000 / 52000 direct labour hours = $9.94 per direct labour hour Answer 2 Allocation of overheads to each product based on direct labour hours used by each. Rattles Piglets Direct Labour hours used $31,000.00 $21,000.00 x Overhead rate $9.94 $9.94 Allocation of overheads   $308,212.00 $208,788.00 Answer 3 Calculation of overhead cost per unit Rattles Piglets Allocated Overheads $308,212.00 $208,788.00 / No.of units produced 45000 10200 Overhead cost per unit $6.85 $20.47 Answer 4 Calculation of unit product cost Rattles Piglets Direct Material cost $15.00 $30.00 Direct Labour cost $5.25 $14.00 Overhead cost $6.85 $20.47 Unit product cost $27.10 $64.47 Activity Based Costing Answer 5 Determination of activity rates Setup activity rate = Overhead cost / Total no.of setups = $265000 / 3700 setups = $71.62 per setup Material purchasing activity rate = Overhead cost / Total No.of purchase orders = $116000 / 2960 purchase orders =   $39.19 per purchase order Machining / Fabricating activity rate = Overhead cost / Total Machine hours = $136000 / 27400 machine hours = $4.96 per machine hour Answer 6 Allocation of overheads based on activity drivers used by each Rattles Piglets Setup $28,648.65 $236,351.35 Materials Purchasing $89,351.35 $26,648.65 Machining / Fabricating $41,197.08 $94,802.92 Total Overhead allocation $159,197.08 $357,802.92 Answer 7 Calculation of overhead cost per unit Rattles Piglets Allocated Overheads $159,197.08 $357,802.92 / No.of units produced 45000 10200 Overhead cost per unit $3.54 $35.08 Answer 8 Calculation of unit product cost Rattles Piglets Direct Material cost $15.00 $30.00 Direct Labour cost $5.25 $14.00 Overhead cost $3.54 $35.08 Unit product cost $23.79 $79.08

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