manufacturing overhead cost allocation based on considers all of its manufacturi
ID: 2567169 • Letter: M
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manufacturing overhead cost allocation based on considers all of its manufacturing overhead costs to be fixed and it uses plantwide direct labor-hours. Koontz's controller prepared the segmented income statement that is shown below for the most recent year (he allocated seling and administrative expenses to products based on sales dollarsh 20.000 10,000 30,000 Number of units produced and sold $3,000,000 $2,000,000 5,000,000 Sales Cost of goods sold Gross margin Selling and administrative expenses 2,300,000 1,350,000 3,450,000 1,350,000 650,000 480,000 720,000 200,000 s (20,000) 170,000 150,000 Bet operating incone (loss Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company's Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information: 787,500 562,500 $1,330,000 30,000 15,000 Kasufacturing overhead costs Direct labor hours: Basic Advanced 10,000 5,000 20,000 10,000 Machine hours Basic Advanced 12,000 10,000 12,000 10,000 3. Koontz's production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company's total manufacturing overhead cost to five activity cost pools as follows: Activity Cost Machining Assemble and pack Order processing Setups Other (unused capacity) 417,500 282,500 230,000 40,000 80,000 1,350,000 Direct labor bours in Assenble and Pack Nunber of custoner orders Setup hours She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model The company pays a sales commissions of 5% for the Basic model and ION for the Advanced model, lts traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the company's selling and administrative costs are organization-sustaining in nature. Using the additional information provided by the production manager, calculate: a. An activity rate for each activity cost pool. b. The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach. c. The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach. 4. Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 6-8. Hint: Organize all of the company's costs into three categories: variable expenses, traceable fixed expenses and common fixed expenses.) 5. Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.Explanation / Answer
a) Activity Rate for each Activity Cost pool Activity cost Pool Activity measure Manufacturing Overhead Basic Advanced Total Activity measure Activity Rate Machining Machine Hours 417,500 12,000 10,000 22,000 19 Assemble and pack Direct labour hour 282,500 20,000 10,000 30,000 9 Order processing No. of customer orders 230,000 50 200 250 920 Setups setup hours 340,000 50 600 650 523 Other (unused capacity) 80,000 1,350,000 Working Notes: No. of Customer Orders Basic Advanced Average Order Size 400 50 Total Units sold 20000 10,000 No. of Customer Orders 50 200 Setup hours Basic Advanced Set up hours for each customer order 1 3 Customer Orders 50 200 Setup hours 50 600 b) Manufacturing Overhead allocated to Basic and Advanced based on ABC method Activity cost Pool Activity measure Activity Measure Basic Activity Measure Advance Activity Rate Basic Model Overhead Advanced Model Overhead Machining Machine Hours 12,000 10,000 18.98 227,727 189,773 Assemble and pack Direct labour hour 20,000 10,000 9.42 188,333 94,167 Order processing No. of customer orders 50 200 920.00 46,000 184,000 Setups setup hours 50 600 523.08 26,154 313,846 Total Manufacturing Overhead 488,214 781,786 c) Selling and Administration Expenses allocated to Basic and Advanced Model on ABC method Activity cost Pool Activity measure Basic Advanced Sales Commission Sales 150,000 200,000 Advertising traceable 150,000 200,000 Selling and Administration Expenses 300,000 400,000 Working Notes: Sales Commission Assuming it is 5% and 10% of Sales for Basic and Advanced Model respectively. Basic 3,000,000*5% 150000 Advanced 2,000,000*10% 200000 4) Particulars Basic Advanced Total Sales Units 20,000 10,000 30,000 Sales 3,000,000 2,000,000 5,000,000 Variable Expenses: Direct materials 800,000 600,000 1,400,000 Direct Labour 600,000 300,000 900,000 Sales Commission 150,000 200,000 350,000 Contribution 1,450,000 900,000 2,350,000 Traceable Fixed: Manufacturing Overhead 488,214 781,786 1,270,000 Advertising Expense 150,000 200,000 350,000 Common Fixed Expense: Manufacturing Overhead (Other) - - 80,000 Selling and Administration Expenses - - 500,000 Net Income 811,786 (81,786) 150,000 Working notes: Common Fixed Expense Selling and Administration Expense Total Selling and Administration Expenses: 1,200,000 (-) Sales Commission 350,000 (-) Traceable Advertising Expenses 350,000 Remaining Common Expense 500,000 5) Break Even Point in Sales for Advanced Model Break Even Point = Fixed Expenses = Contribution Let Sales be X Fixed Expenses = 981,786 Contribution = 981,786 Variable Expense = Direct Material +Direct labour +Sales Commission 600000+300000+(X*10%) Contribution = X - (600000+300000+0.10X) 981,786 = X - 600000-300000-0.10ZX 981,786 = 0.90X - 900000 1,881,786 = 0.90X 2,090,873 = X Break Even Sales for Advanced Model 2,090,873
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