Product Costing: Company-wide Overhead Versus ABC LaMesa produces machine parts

Question

Product Costing: Company-wide Overhead Versus ABC LaMesa produces machine parts as a contract provider for a large manufacturing company. LaMesa produces two particular parts, shafts and gears. The competition is keen among contract producers, and LaMesa's top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to LaMesa's survival. LaMesa's president, Jose Rodriguez, has observed that the company's current cost to produce shafts is $21.35, and the current cost to produce gears is $12.36. He indicated to the controller that he suspects some problems with the cost system because LaMesa is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. He is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. He asked the controller, Felix Bernhardt, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month: Production units Selling price Overhead per unit (based on direct labor hours) Materials and direct labor cost per unit Number of production runs Number of purchasing and receiving orders processed Number of machine hours Number of direct labor hours Number of engineering hours Number of material moves 50,000 10,500 $31.86 $24.00 $12.82 $6.10 $8.53 $6.26 0 20 100 12,750 6,000 25,000 2,500 5,000 5,000 50 40 The controller was able to summarize the company's total manufacturing overhead into the following pools: $30,000 75,000 Purchasing and receiving costs210,000 200,000 90,000 $705,000 Setup costs Machine cost Engineering costs Materials handling costs

Explanation / Answer

All Amounts in $ a. Calculate LaMesa's current company-wide overhead rate based on direct labor hours. Round rate to two decimal places. Total Overheads from table given 7,05,000 a No. of direct labor hours 27,500 b Answer per direct labor hour 25.63636 $ per labor hour a / b b. Verify LaMesa's calculation of overhead cost per unit of 12.82 for shafts and 6.10 for gears. Use rounded rate calculated above. Round per unit rate to two decimal places. Rate X Hours = Overhead ÷ Units = Per Unit Shafts: 25.63636 25000 640909.1 50,000 12.82 Gears: 25.63636 2500 64090.91 10,500 6.104 c. Calculate the manufacturing overhead cost per unit for shafts and gears using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Round answers to two decimal places, if needed. Formula for calculating each cost = Total Overhead Cost / Total Activity Driver Value Setup 1000   per production run Total Setup Costs / Total Production Runs = 30,000 / (20 + 10) Machine 6.36    per machine hour Total Machine Costs / Total Machine Hours = 175,000 / (25,000 + 2,500) Purchasing & receiving 1500    per order Total Purchasing & Receiving Costs / Total Orders = 210,000 / (40 + 100) Engineering 20    per hour Total Engineering Costs / Total Enginering Hours = 200,000 / (5,000 + 5,000) Materials handling 1000    per move Total Material Handling Costs / Total Moves = 90,000 / (50 + 40) Use the most appropriate activity driver for assigning activity costs to the two products. Use rounded overhead rates calculated above for calculations below. Round cost answers to the nearest whole number, when needed. Round overhead cost per unit to two decimal places. Shafts Gears Setup 20000 10000 Machine 159091 15909 Purchasing 60000 150000 Engineering 100000 100000 Materials handling 50000 40000 Total ABC overhead cost 389091 315909 Number of units produced 50000 10500 Overhead cost per unit 7.78 30.09

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