Obj. 2, 4 Whirlpool Corporation conducted an activity-based costing study of its
ID: 2551257 • Letter: O
Question
Obj. 2, 4 Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:
Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $200 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows:
Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). (Round per-unit overhead to two decimal places and percents to one decimal place.)
Answer
Check Figure: Low, Col. C, 93.5%
Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method?
Three Representative Refrigerators Number of Machine Hours Number of Setups Number of Sales Orders Number of Units Refrigerator—Low Volume 24 14 38 160 Refrigerator—Medium Volume 225 13 88 1,500 Refrigerator—High Volume 900 9 120 6,000Explanation / Answer
Solution:-
the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method, Because under traditional method the total O/H cost is allocated on the basis of machine hour but in ABC costing , there are 3 different type of activities
Product Volume Class Column A Single Rate Overhead Allocation per Unit Column B ABC Overhead Allocation per Unit Column C Percent Change in Allocation (Col. B – Col. A)/Col. A Low (24 * 200) = 4800 (24*160)+(14*240)+(38*55) = 9290 (9290-4800)/4800 = 93.54% Medium (225 * 200) = 45000 (225*160)+(13*240)+(88*55) = 43960 (43960-45000)/45000 = -2.31% High (900 * 200) = 180000 (900*160)+(9*240)+(120*55) = 155760 (155760-180000)/180000 = -12.47%Related Questions
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