Activity-Based Costing The president of H&Y Company has been concerned about the
ID: 2422697 • Letter: A
Question
Activity-Based Costing
The president of H&Y Company has been concerned about the profitability of the company product lines.
First, she wants you to examine the current situation using traditional approach of allocating overhead.
Second, she wants you to apply Activity-Based costing to develop a new product cost for each product
line. Third, she wants your opinion about the best approach to use to determine the products' unit cost.
1. The expected level of sales is 200 of each product.
Product A selling price: $11,000
Product B selling price: $20,000
2. Direct Material cost per unit Product A $6,700
Direct Material cost per unit Product B $12,600
3. Direct Labor cost per unit Product A $380
Direct Labor cost per unit Product B $2,000
4. Factory Overhead Activities:
a. Every product is inspected.
b. Product A moving parts oiled:
5 parts per product
Product B moving parts oiled: 3 parts per product
c. Material is delivered to each of the product lines on a daily basis.
Product A 5 times per week
Product B 5 times per week
d. Product A redesign: 5 hours per week
Product B redesign: 20 hours per week
e. Product A supplier purchase orders: 5 times per week
Product B supplier purchase orders: 2 times per month
f. Facility administration is based on direct labor costs.
Total Estimated Activity Cost
Activity Cost Driver Estimated Cost
Inspection # units $190,000
Lubricating oil # oil applications $80,000
Material handling # deliveries $100,000
Product design # redesign hours $456,000
Purchase orders # purchase orders $90,000
Facility Administration direct labor cost ($) $36,000
Total factory overhead $952,000
For this challenge, both Product A and Product B have a planned level of production of 200 units each.
You will need to use the per unit data on the first page and the planned number of units in production
to calculate the total planned levels of activity.
When calculating the activity rate (#2) you will need to round to 3 decimal places for product design,
material handling, and purchases orders. You need to round faculty administration rate to 5 decimal places.
Then when you use these rates for #3 round to a whole number.
Planned Activity Level
Cost Driver Product A Product B Total
# products inspected
# oil applications
# deliveries
# redesign hours
# purchase orders
direct labor cost ($)
1. Calculate the factory overhead using traditionally allocated predetermined overhead rate of
200% of direct labor cost.
Direct Labor Cost per Unit Overhead Allocation per unit Total Overhead Allocation (@ 200 products)
Product A
Product B
Total
2. Calculate the planned activity rate for each cost pool using the Activity-Based Costing Method
Activity Estimated Cost Total Planned Activity Level Planned Activity Rate
Inspection
Lubricating oil
Material handling
Product design
Purchase orders
Facility Administration
3. Calculate the factory overhead allocated to the product lines using ABC method:
Activity Product A Product B Total
Inspection
Lubricating oil
Material handling
Product design
Purchase orders
Facility Administration
Total
4. Complete the following table:
Factory Overhead Comparison Traditional ABC Difference
Product A
Product B
Total
5. Calculate the unit cost using traditional method and ABC method of allocating overhead.
Traditional Method Product A Product B
Direct Materials per product
Direct Labor per product
Factory Overhead
Total cost per product
Gross profit per product
ABC Method Product A Product B
Direct Materials per product
Direct Labor per product
Factory Overhead
Total cost per product
Gross profit per product
6. Under which method is the most overhead charged to production this year?
7. How will this affect net income?
8. Which method would you prefer to use? Why?
Explanation / Answer
(‘1) Factory Overhead based on 200 % of direct labor cost
Product
Direct Labor Cost per unit
Overhead allocation per unit
Total Overhead Allocation ( 200 units)
Product A
380
760
152,000
Product B
2,000
4000
800,000
Total
952,000
(‘2) Planned Activity Rate for each cost pool using the ABC Method
Activity
Estimated Cost
Cost Driver
Total Planned Activity Level
Planned Activity Rate
Inspection
190,000
Number of units
400
(200+200)
475
Lubricating Oil
80,000
Number of oil applications
1600
(5*200+3*200)
50
Material Handling
100,000
Number of deliveries
520
(5*52 +5*52)
192.308
Product Design
456,000
Number of redesign hours
1,300
(5*52+ 20*52)
350.769
Purchase Orders
90,000
Number of purchase orders
284
(5*52+2*12)
316.901
Facility Administration
36,000
Direct Labor Cost
476,000
(total labor cost)
0.07563
(‘3) Factory Overhead allocated to product lines as per ABC
Activity
Product A
Product B
Total
Inspection
95,000
95,000
190,000
Lubricating Oil
50,000
30,000
80,000
Material Handling
50,000
50,000
100,000
Product Design
91,200
364,800
456,000
Purchase Orders
82,394
7,606
90,000
Facility Administration
5,748
30,252
36,000
Total
374,342
577,658
(‘4) Overhead Comparison
Traditional
ABC
Difference
Product A
152,000
374,342
222,342
Product B
800,000
577,658
(222,342)
Total
952,000
952,000
(‘5) Unit Cost of Product
Traditional
ABC
Particulars
Product A
Product B
Product A
Product B
Direct Material Cost
6,700
12,600
6,700
12,600
Direct Labor cost
380
2,000
380
2,000
Factory Overhead
760
4000
1871.71
2888.29
Total Cost (a)
7840
18,600
8951.71
17488.29
Selling Price (b)
11,000
20,000
11,000
20,000
Gross Profit
3,160
1400
2048.29
2511.71
Product
Direct Labor Cost per unit
Overhead allocation per unit
Total Overhead Allocation ( 200 units)
Product A
380
760
152,000
Product B
2,000
4000
800,000
Total
952,000
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