Question 10: Absorption Costing and ABC Trusty Electronics Limited manufactures

Question

Question 10: Absorption Costing and ABC Trusty Electronics Limited manufactures only two (2) products: a major headset part, and a dishwasher The company uses the activity-based costing system with the three main cost drivers of activity noted in the table below. Any additional overhead costs are currently allocated using a plant-wide overhead rate External cost consultants have recommended, however, that the company should switch to a traditional absorption costing system. based on direct labour hours. The company estimates that during 2020 it (the company) will produce 21,000 major headset parts/units, and 14,000 dishwashers. Each major headset unit requires three (3) direct labour hours to produce w the dishwashers take four (4) direct labour hours to produce. The direct material and direct labour costs included in the two products are as follows: Items Direct Labour (per component) Dires Matcnal per conponen) Headset Unit $120 S56 Dishwasher $87 The budgeted (estimated) total factory overhead data for 2018 is given as: Budgeted Overhead (S) Estimated Volume Items 30 Set-Ups 15,000 kgs 9,000 boxes $3,480,000 Production Set-Ups Material Handling Packaging and Shipping S1,570,000 Total Factory Overhead $11,970,000 Based on analysis of the consultants of the three overhead activities, it is estimated the two production activities in 2018 is as follows: Headset Unit Activity Production Set-Ups Material Handling Packaging and Shipping Dishwasher Overall 30 Set-Ups 10 Set-Ups20 Set-Ups 10,000 kgs 5,000 boxes 5,000 kgs15,000 kgs 4.000 boxes 9,000 boxes Required: A. Calculate the cost of both products based on a traditional plant-wide rate using direct labour costs to assign overheads. B. Calculate the activity cost rates for: a. Set-Ups; b. Material Handling c. Packaging and Shipping. C. Cost the two products using an activity-based costing system. 13

Explanation / Answer

Here you go with my calculations, hope this helps.

Part A

To find out total cost we need Direct Material Cost(given), Direct Labour Cost(given) and Applied factory overhead per unit, we need to ascertain the Applied overhead rate per direct labour hour to find out the applied factory overhead per unit.

so the units to be produced x hours to produce = total hours
For Headset unit it is 21000x3 = 63000 hours
For Diswasher unit it is 14000x4 = 56000 hours
total combined hours = 63000+56000 = 119000 hours

Applied overhead rate per direct labour hour = Total Factory Overhead/total combined hours
Total Factory Overhead is given as 11,970,000 and total combined hours we found is 119,000

Hence the Applied overhead rate per direct labour hour = 11,970,000/119,000 = 100.5882353
Now the Applied overhead per unit = Applied overhead rate per direct labour hour x Hours to produce.

For Headset unit it is 100.588x3 = 301.764
For Diswasher unit it is 100.588x4 = 402.352

Hence we sum up these to get the total cost.
Conclusion - Total cost of headset unit is 477.76 and dishwasher is 550.35

Part B

Rate per Activity can be calculated by Bugeted Overhead/Overall activity
Budgeted overhead as below
Production set-ups - 3480000
Material and Handling - 1570000
Packaging and shipping - 2520000
Other Overhead = Total Overheads - Given overheads
Other Overheads = 11970000-3480000-1570000-2520000 = 4400000

so the Rate per activity is now ascertained as
Production set-ups - 3480000/30 = 116000 per set up
Material and Handling - 1570000/15000 = 104.66667 per kilogram
Packaging and shipping - 2520000/9000 = 280 per box
Other Overhead - 4400000/119000(total combined hours from part A) = 36.974 per direct labour hour

Part C
Now we need to find out the Total cost of Headset and Dishwaser separately
Overhead per component = Total Overheads/Number of units to be produced
Total Overheads = Activity rate number x Rate per activity

For Headset,
Production set-up   10 set-ups
Material handling   10000 kgs  
packaging and shipping   5000 boxes  
other overheads       63000 hours as found in Part A
Number of units to be produced = 21000

For Dishwasher,
Production set-up   20 set-ups
Material handling   5000 kgs  
packaging and shipping   4000 boxes  
other overheads       56000 hours as found in Part A
Number of units to be produced = 14000

So,

              

Headset unit Activity rate number rate per activity total overheads overhead per component Production set-up 10 116000 1160000 55.2381 Material handling 10000 104.66667 1046666.7 49.84127 packaging and shipping 5000 280 1400000 66.66667 other overheads 63000 36.97478992 2329411.765 110.9244 282.6704

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