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Zeta Company is preparing its annual profit plan. As part of its analysis of the

ID: 2591944 • Letter: Z

Question

Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below:

Wall Mirrors Specialty Windows

Units produced 25 25

Material moves per product line 5 15

Direct labor hours per unit 200 200

Budgeted materials handling costs $50,000

A) Under a costing system that allocates overhead on the basis of direct labor hours, Zeta Company’s materials handling costs allocated to one unit of wall mirrors would be:

B) Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall mirrors would be:

Explanation / Answer

A)

Budgeted materials handling costs = 50000

Total direct labor hours = (25+25)*200 = 10000

Overhead Cost per direct labor hour = 50000/10000 = 5

Overhead Cost per unit of Wall Mirrors = 5*200 = 1000

B)

Budgeted materials handling costs = 50000

Total material moves per product line = 5 + 15 = 20

Material handling cost allocated to Wall Mirrors = (50000/20) *5 = 12500

Units produced of Wall Mirrors = 25

Materials handling cost per unit = 12500/25 = 500