Exercise 17-5 Perdon Corporation manufactures safes-large mobile safes, and larg

Question

Exercise 17-5 Perdon Corporation manufactures safes-large mobile safes, and large walk-in stationary bank safes. As part of its annual budgeting process, Perdon is analyzing the profitability of its two products. Part of this analysis involves estimating the amount of overhead to be allocated to each product line. The information shown below relates to overhead. Units planned for production Material moves per product line Purchase orders per product line Direct labor hours per produet line Mobile Safes 190 290 460 790 Walk-in Safes 46 230 340 1,710 The total estimated manufacturing overhead was $265,000. under traditional costing (which assigns overhead on the basis of direct labor hours what mount of manufacturing overhead costs are assigned to: (Round answers to 2 decimal places, e.g. 12.25.) (1) One mobilc safcs (2) One walk in safc unit unit LINK TO T (Rond answers to 2 decimial The total estimated manufacturing overhead of $265,000 was comprised of $163,000 for rraterials handling costs and $102,000 for puchasig activity custs. Under activity-based costing (ARC places, e.g. 12.25.) what mount of materials handling costs are assigned to: (a) One mobile safe s per unit

Explanation / Answer

Answer 1 Traditional Costing Predetermined overhead application rate = Total Estimated manufacturing overheads / Total no.of direct labour hours Predetermined overhead application rate = $265000 / (790+1710) direct labour hours = $106 per direct labour hour Calculation of manufacturing overhead cost assigned Mobile Safe Walk in safe Manufacturing Overhead cost assigned - 790 DLH * $106 $83,740.00 - 1710 DLH * $106 $181,260.00 Total Manufacturing Overheads $83,740.00 $181,260.00 / Units planned for production 190 46 Manufacturing Overhead per unit $440.74 $3,940.43 Answer 2 Activity based costing Material Handling activity driver rate = Material handling costs / Total no.of material moves = $163000 / 520 material moves = $313.46 per material move Purchasing activity driver rate = Purchasing activity costs / Total purchase orders = $102000 / 800 purchase orders = $127.50 per purchase order Calculation of material handing cost assigned Mobile Safe Walk in safe Material Handling cost assigned - =(163000/520)*290 $90,903.85 - =(163000/520)*230 $72,096.15 Total Material handing cost $90,903.85 $72,096.15 / Units planned for production 190 46 Material handing cost per unit $478.44 $1,567.31 Calculation of purchasing activity cost assigned Mobile Safe Walk in safe Purchasing activity cost assigned - =(102000/800)*460 $58,650.00 - =(102000/800)*340 $43,350.00 Total Manufacturing Overheads $58,650.00 $43,350.00 / Units planned for production 190 46 Purchasing activity cost per unit $308.68 $942.39 Comparison of the amount of overhead allocated to one mobile safe and one walk in safe under the traditional costing approach versus under ABC Traditional Costing Activity based costing Mobile Safe $440.74 $787.13 Walk in safe $3,940.43 $2,509.70

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