5. Compare the overfhead costs per unit computed in rench more accurately assign
ID: 2581976 • Letter: 5
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5. Compare the overfhead costs per unit computed in rench more accurately assigns overhead costs? cut to Problem C-2A Pricing analysis with ABC and a plantwide overhead rate A1 P1 P2 Tent Master produces two lines of tents sold to outdoor enthusiasts. The tents are ABCadiin department A. In department B the tents are sewn and folded. The activities, cost sociated with these two manufacturing processes and the company's production support acti Driver Overhead Cost $ 64.400 Activity Pattern alignment Moving product Batches 560 Department A Machine hours 12,300 430 50.4 00800 Moves 327,600 Direct labor hours4.200 600 Department B Sewing 24,000 47.880 5399,480 Inspections Units $280000 Modéication onders Design Providing space 8600 920.000 51,600 Square feet handing 184,000 Spare yards $515.600 Additional production information on the two lines of tents follows. Pup Tent Pop-up Tent Units produced 15,200 units 800 moves 140 batches 240 inspections L600 moves 420 batches 360 inspections 5,300 MH 1,600 DLH 210 modification orders 4.300 square feet Batches Number of inspections.. Machine hours Direct labor hours Modfication onders... Space occupied Material required 7.000 MH 2,600 DLH 70 modification orders 4.300 square feet quare yards 470,000 square yards 1. Using a plantwide overhead rate based on direct labor hours. 2. Using the plantwide owerfhead rate, determine the total cost per unit for the two prodacts if the direst 3. If the market price of the pup tent is $65 and the market price of the pop-up tent is 4. 5. If the market price is 565 per pup tent and $200 per pop-up tent, determine the gross prolint 6. Would your pricing analysis be improved if the company used, instead of ABC compute the overhead cost that is as- signed to each pup tent and each pop-up tent. materials and direct labor cost is $25 per pup tent and $32 per pop-up tent. the $200, determine Check 4i) Pup tent, $58.46 per unit cost gross profit per unit for each tent. What might management conclude about the pup tent Using ABC, compute the total cost per unit for each tent if the direct labor and direct materials c $25 per pup tent and $32 per pop-up tent each tent. Comment on the results. determined using machine hours in department A and direct labor hours in departmentExplanation / Answer
Answer 1. Plantwide overhead Rate = Total Overhead / Allocation Base Total Overhead: Department A 215,630 Department B 399,480 Support 515,600 Total Overhead 1,130,710 Direct Labor Hours = 2,600 hrs + 1,600 hrs = 4,200 Hrs Plantwide overhead Rate = $1,130,710 / 4,200 DLH Plantwide overhead Rate = $269.22 per DLH (Approx.) Allocation of Overhead: Pup Tent - $269.22 X 2,600 DLH 699,963 Pop-up Tent - $269.22 X 1,600 DLH 430,747 Total Overhead 1,130,710 Answer 2. Calculation of Cost per Tent: Pup Tent Pop-up Tent Direct Material & Direct Labor 25.00 32.00 Overhead Cost per Unit 46.05 56.68 Total Cost per Unit 71.05 88.68 Answer 3. Pup Tent Pop-up Tent Selling Price per Tent 65.00 200.00 Cost per Tent 71.05 88.68 Gross Profit per Tent (6.05) 111.32 As per the above statement, it appears that Pup Tent is not profitable. The Company may decide to increase the selling price or dropping the Pup Tent from production. Answer 4. Activity Overhead Cost Driver Quantity Activity Rate Pattern Allignment 64,400 560 batches 115.00 per batches Cutting 50,430 12,300 mach Hrs 4.10 per mach Hrs Moving Product 100,800 2,400 moves 42.00 per moves Sewing 327,600 4,200 DLH 78.00 per DLH Inspecting 24,000 600 inspections 40.00 per inspections Folding 47,880 22,800 Units 2.10 per Units Design 280,000 280 Mod. orders 1,000.00 per Mod. orders Providing Space 51,600 8,600 sq. feet 6.00 per sq. feet Material Handling 184,000 920,000 sq. yards 0.20 per sq. yards Total 1,130,710 Assigning Overhead Cost to Product Using ABC Method Activity Based Overhead Rate Pup Tent Pop-up Tent Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Pattern Allignment 115.00 per batches 140 batches 16,100 420 batches 48,300 Cutting 4.10 per mach Hrs 7,000 mach Hrs 28,700 5,300 mach Hrs 21,730 Moving Product 42.00 per moves 800 moves 33,600 1,600 moves 67,200 Sewing 78.00 per DLH 2,600 DLH 202,800 1,600 DLH 124,800 Inspecting 40.00 per inspections 240 inspections 9,600 360 inspections 14,400 Folding 2.10 per Units 15,200 Units 31,920 7,600 Units 15,960 Design 1,000.00 per Mod. orders 70 Mod. orders 70,000 210 Mod. orders 210,000 Providing Space 6.00 per sq. feet 4,300 sq. feet 25,800 4,300 sq. feet 25,800 Material Handling 0.20 per sq. yards 450,000 sq. yards 90,000 470,000 sq. yards 94,000 Total Overhead Cost 508,520 622,190 No. of Units Produced 15,200 7,600 Overhead Cost per Unit 33.46 81.87 Pup Tent Pop-up Tent Direct Material & Direct Labor 25.00 32.00 Overhead Cost per Unit 33.46 81.87 Cost Per Unit 58.46 113.87 Answer 5. Pup Tent Pop-up Tent Selling Price per Tent 65.00 200.00 Cost per Tent 58.46 113.87 Gross Profit per Tent 6.54 86.13 As per the above statement, both products are profitable under ABC Costing. ABC costing is better method to allocate the overhead cost than Traditional costing because it takes all the factors into account for distribution of overhead. Answer 6. Departmental overhead rates based on direct labor hours and machine hours are still volume-based measures and would not improve the accuracy of cost assignment relative to ABC. Departmental overhead rates may be an improvement over a plantwide rate because the departmental rates at least recognize differences in drivers between departments.
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