Escuha Company produces two type of calculators: scientific and business. Both p
ID: 2456568 • Letter: E
Question
Escuha Company produces two type of calculators: scientific and business. Both products pass through two producing departments. The business calculator is by far the most popular. The following data have been gathered for these two products: Product-Related Data
Scientific
Business
Units produced per year
75,000
750,000
Prime costs
$250,000
$2,500,000
Direct labor hours
100,000
1,000,000
Machine hours
50,000
500,000
Production runs
100
150
Inspection hours
2,000
3,000
Maintenance hours
2,250
9,000
1) Compute the overhead cost per unit for each product using a plantwide, unit-based rate using direct labor hours.
2) Compute the overhead cost per unit for each product using departmental rates. In calculating departmental rates, use machine hours for Department 1 and direct labor hours for Department 2. Repeat using direct labor hours for Department 1 and machine hours for Department 2.
3) Compute the overhead cost per unit for each product using activity-based costing.
4) Comment on the ability of departmental rates to improve the accuracy of product costing.
Escuha Company produces two type of calculators: scientific and business. Both products pass through two producing departments. The business calculator is by far the most popular. The following data have been gathered for these two products: Product-Related Data
Scientific
Business
Units produced per year
75,000
750,000
Prime costs
$250,000
$2,500,000
Direct labor hours
100,000
1,000,000
Machine hours
50,000
500,000
Production runs
100
150
Inspection hours
2,000
3,000
Maintenance hours
2,250
9,000
Explanation / Answer
Part 1)
To calculate the overhead cost per unit, we need to calculate the plantwide rate with the use of following formula:
Plantwide Rate = Total Estimated Overhead/Total Direct Labor Hours
The overhead cost per unit can be calculated with the use of following formula:
Overhead Cost Per Unit = (Direct Labor Hours*Plantwide Rate)/Units Produced
__________
Using the information provided in the question, we get,
Plantwide Rate = (850,000 + 800,000)/(100,000 + 1,000,000) = $1.5 per hour
__________
Overhead Cost Per Unit (Scientific) = (100,000*1.5)/75,000 = $2 per unit
Overhead Cost Per Unit (Business) = (1,000,000*1.5)/750,000 = $2 per unit
__________
Part 2)
The overhead cost per unit based on departmental rates has been calculated as follows:
A)
Department 1 Overhead Rate Per Machine Hour = Total Overheads/Total Machine Hours = 850,000/425,000 = $2 per machine hour
Department 2 Overhead Rate Per Labor Hour = Total Overheads/Total Labor Hours = 800,000/912,500 = $.8767 per labor hour
__________
Overhead Cost Per Unit (Scientific) = (25,000*2 + 25,000*.8767)/75,000 = $.9589 or $.96
Overhead Cost Per Unit (Business) = (400,000*2 + 887,500*.8767)/750,000 = $2.10
__________
B)
Department 1 Overhead Rate Per Labor Hour = Total Overheads/Total Labor Hours = 850,000/187,500 = $4.53 per labor hour
Department 2 Overhead Rate Per Machine Hour = Total Overheads/Total Labor Hours = 800,000/125,000 = $6.4 per machine hour
__________
Overhead Cost Per Unit (Scientific) = (75,000*4.53 + 25,000*6.4)/75,000 = $6.67
Overhead Cost Per Unit (Business) = (112,500*4.53 + 100,000*6.4)/750,000 = $1.53
__________
Part 3)
The overhead cost per unit with the use of ABC has been calculated below:
__________
Part 4)
Departmental rates will provide inaccurate results as the percentage of overhead costs which are not based on units. In the given case, all the overhead costs are based on factors (such as production runs, maintenance hours and inspection hours). Secondly, there is a difference in the usage of resources(also known as consumption ratio) by the 2 products. Therefore, allocating overhead on the basis of departmental rates can provide misleading figure. To overcome this limitation, it is advisable to use activity based costing, under which costs are allocated to products on the basis of actual consumption of resources/usage of activities.
Cost Basis of Allocation Activity Rate (Total Costs/Total Basis) Scientific Business Total Setup Costs Production Runs 1,800 (225,000 + 225,000)/(100+150) 180,000 (1,800*100) 270,000 (1,800*150) 450,000 Inspection Costs Inspection Hours 70 (175,000+175,000)/(2,000 + 3,000) 140,000 (70*2,000) 210,000 (70*3000) 350,000 Power Machine Hours 0.73 (250,000 + 150,000)/(50,000 + 500,000) 36,364 (.73*50,000) 363,636 (.73*500,000) 400,000 Maintenance Maintenance Hours 40 (200,000 + 250,000)/(2,250 + 9,000) 90,000 (40*2,2500 360,000 (40*9,000) 450,000 Total Overheads (A) $446,364 $1,203,636 $1,650,000 Total Units (B) 75,000 750,000 Overhead Cost Per Unit (A/B) $5.95 $1.60Related Questions
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