The lead accountant has compiled the following data in Overhead Costs ration for

Question

The lead accountant has compiled the following data in Overhead Costs ration for allocating overhead to three cost drivers. Utilities $50,000 Utilities (p hone, electric, water, gas, etc.) Admin/MGMT $150,000 CEO, VPs, Supervisors, Secretary staff costs Factory Costs 500,000 Building lease & equipment $700,000 (10) A. Allocate the $700,000 of monthly overhead costs to the following three cost drivers: 1) Units Produced 2) Direct Labor Hours 3) Raw Material Costs to determine the final product cost per unit (which Labor Hrs Per Widget Direct Labor Cost per Widget Std Labor Rate ($/hr: $25.00 Widget-1 Widget-2 Widget-3 $75.00 $150.00 300.00 12 Drivers Units Produced in Factory (all inclusive) 25,500 Widget-1 10,000 units per month Widget-2 15,000 units per month Widget-3 500 units per month Widget-1 30,000 hours per m Widget-2 90,000 hurs per month Widget-3 Direct Labor Hours 126,000 6,000 hours per month 5.00 per unit of Widget-1 20.00 per unit of Widget-2 200.00 Raw Material Costs r unit of (5) B. Which of the three methods causes the Final Product Cost of Widget-3 to exceed $600? In 30 words or less, why did this occur? (5) C. If the current sales price of Widget-3 is only $800, as the lead accountant, name at least TWO strategies you should consider to make Widget-3 a viable product to sell/produce (increasing the sales price is not an option)?

Explanation / Answer

Per unit cost 1..On the basis of units produced: Widget-1 10000/25500*700000= 274510 27.45 Widget-2 15000/25500*700000= 411765 27.45 Widget-3 500/25500*700000= 13725 27.45 700000 2..On the basis of Direct Labor hours: Widget-1 30000/126000*700000= 166667 16.67 Widget-2 90000/126000*700000= 500000 33.33 Widget-3 6000/126000*700000= 33333 66.67 700000 3..On the basis of total Raw material costs: Total raw materials Widget-1 10000*5= 50000 Widget-2 15000*20= 300000 Widget-3 200*500= 100000 450000 Widget-1 50000/450000*700000= 77778 7.78 Widget-2 300000/450000*700000= 466667 31.11 Widget-3 100000/450000*700000= 155556 311.11 700000 Product Cost/unit OH on the Basis of Total Cost/unit on the basis of Raw material Direct Labor Units produced Direct Labor hrs. Raw materials Units produced Direct Labor hrs. Raw materials Widget-1 5 75 27.45 16.67 7.78 107.45 96.67 87.78 Widget-2 20 150 27.45 33.33 31.11 197.45 203.33 201.11 Widget-3 200 300 27.45 66.67 311.11 527.45 566.67 811.11 From the above, the final product cost/unit of Widget-3 exceeds $ 600 when OHs are allocated as per total raw material costs. Because --- both raw material & labor costs are maximum & Ohs allocated based on raw materials are also maximum for Widget-3 5.c. Some strategies to make Widget-3 , a viable product: 1.Can explore possiblities of cheaper raw material & cheap labor. 2.. Allocate Ohs on a different basis --activity based OH allocation can be tried.

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