Review Problem on Cost Drivers and Product-Cost Distortion Edgeworth Box Corpora

Question

Review Problem on Cost Drivers and Product-Cost Distortion Edgeworth Box Corporation manufactures a variety of special packaging boxes used in the pharmaceutical industry. The company's Dallas plant is semiautomated, but the special nature of t boxes requires some manual labor. The controller has chosen the following activity cost pools, cost drivers, and pool rates for the Dallas plant's product-costing systerBudgeted he Level for Cost Pool Rate B Driver $1,000,000 5,000 hrs. Overhead Cost Cost Driver Activity Cost Pool Purchasing, storage, 20% of material cost Raw-material costs Hours in design $ and materlal handling. Engineering and produc 20000 $20per hour 100,000 70,000 Production nuns design ,000 runs $70per run 100,000 hrs $3 per hour 100,000 hrs. $2 per hour Machine setup costs Machine depreciation and maintenance insurance, and utilities. costs 300,000 Machine hours 200,000 Machine hours 150,000 Machine hours 100,000 hrs. $1.50per hour 3G Factory depreciabion, laxes, ??#6 8496 Total $1,020,000 ?. 42 of Box W29L12 s35,000 B Two recent production orders had the following requirements. 10,000 Units 21 hr 25 20 20,000 Units of Box C52 42 h Direct-labor hours... Raw-material cost Hours in design department Production runs... Machine hours.... ?? $40,000 10 Required Compute thetotal overheadthat should be assigned to each of the two production orders C52 anc W29 Compute the overhead cost per box in each order. Suppose the Dallas plant were to use a single predetermined overhead rate based on direct-labor hours. The direct-labor budget calls fort 4,000 hours 1. a. Compute the predetermined overhead rate per direct-labor hour Compute the total overhead cost that would be assigned to the order for box C52 and the order for box W29. Compute the overhead cost per box in each order. C255) C. do the two product yield such widely differing overhead r box?

Explanation / Answer

1. Total Overhead Cost (Amt in $)

Particulars

W29 Amount

40000*20%

4*70/run

7910

3

a) Overhead Recovery Rate based on direct labour hours

= Total Overhead Cost/ Budgeted Direct Labour Hours

= $1020000/4000

= $ 255/direct labour hour

b) Total Overhead Cost

C52 = Labour Hours* Recovery Rate/hour

= 42*255

= $ 10710

W29 = 21*255

= $ 5255

c) Overhead Cost per Box

C52 = Total Cost/No of Boxes = $10710/20000

= $ 0.5355/hour

W29 = $5355/10000

= $ 0.5355/ hour

4) The two product costing systems here are activity based costing (ABC) & the traditional costing based on labour hours.

The ABC assigns the cost on the basis of usage of activities while the traditional costing uses an arbitrary average rate for allocation

Traditional Costing is optimal when indirect cost are low compared to direct. It may also lead to under or over costing at times whereas the ABC gives precise breakdown of Indirect Cost

Particulars

C52 Working(20000 Units) C52 Amt W29 Working(10000 Units)

W29 Amount

Purchase/ storage & Mat Handling

40000*20%

8000 35000*20% 7000 Engineering/Product Design 10*20/hour 200 25*20/hr 500 Machine Set Up Cost 2*70/run 140

4*70/run

280 Machine Dep & Maint. 24*3/hr 72 20*3/hr 60 Factory Dep, Taxes, Insurance 24*2/hr 48 20*2/hr 40 Other Manufacturing cost 24*1.5/hr 36 20*1.5/hr 30 Total Overhead Cost 8496

7910

2. Overhead Cost Per Box 8496/20000 0.4248 7910/10000 0.7910

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