The Perkins Corporation produces three products, Alpha, Beta, and Gamma. The com

Question

The Perkins Corporation produces three products, Alpha, Beta, and Gamma. The company uses a costing system that accumulates all overhead in a single cost pool and allocates it based on direct labor hours. Management has decided to implement an activity-based costing system. A study revealed that significant amounts of batch-level overhead costs are incurred in requisitioning, retrieving, moving and handling materials The number of material requisitions was selected as the activity driver for this cost pocl and direct labor hours will still be used as the allocation base for all remaining overhead costs. Information concerning their most recent year of operations follows: GammaTotal Units produced 30,000 50 31,050 Direct material unit cost 2 Total material cost$60,000 20 $20,000 100 $5,000 $85,000 Direct labor Hours per unit Total hours Total direct labor 1.5 45,000 $300,000 4.5 10 500 $5,000 50,000 $340.000 $35,000 Setups Design changes Material pounds Material requisitions150 150 12 26,900 100 10 4,100 200 50 10 1,800 150 300 32 32,800 500 $400,000 $600,000 Batch level Other Required: Calculate the unit product cost for the two products using (o) the existing cost system and (b) an activity-based costing system.

Explanation / Answer

a) Existing cost system Alpha Beta Gamma Total Direct material cost 60000 20000 5000 85000 Direct labor cost 300000 35000 5000 340000 Overhead 900000 90000 10000 1000000 ((400000+600000)*45000/50000) (1000000*4500/50000) (1000000*500/50000) Total product costs 1260000 145000 20000 1425000 Units produced 30000 1000 50 Product cost per unit 42 145 400 b) ABC system Alpha Beta Gamma Total Direct material cost 60000 20000 5000 85000 Direct labor cost 300000 35000 5000 340000 Overhead: Batch level 120000 160000 120000 400000              Other overhead 540000 54000 6000 600000 Total product costs 1020000 269000 136000 1425000 Units produced 30000 1000 50 Product cost per unit 34 269 2720 WN1 : Overhead allocation as per ABC system Alpha Beta Gamma Activity driver Total costs Total activity usage Cost per activity Activity usage Total costs Activity usage Total costs Activity usage Total costs Batch level overhead Material requisition 400000 500 800 150 120000 200 160000 150 120000 Other overhead Direct labor hours 600000 50000 12 45000 540000 4500 54000 500 6000 Total 1000000

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