EX 7 : Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 con

Question

EX 7 :

Sand Castle Manufacturing produces concrete yard art. Recently, 2,500 concrete seahorses were produced in a production run. The run required 1,250 machine hours, and also required five "set-ups" of mixing equipment. Final inspection required 50 hours of inspection activity. Overhead is estimated at $30 per machine hour, plus $2,750 per "set-up," and $25 per inspection hour. Direct materials and direct labor total $75 per seahorse.

(a) Apply activity-based costing and determine the amount assigned to a concrete seahorse.

(b) For GAAP purposes, Sand Castle applies traditional costing methods, and allocates overhead at $50 per machine hour. How much cost would be assigned to the 2,500 seahorses? What is the per unit cost of a seahorse under the traditional approach? What might explain the higher cost assignment, and how could this influence business decision making?

THE FINAL ANSWERS ARE Total cost under ABC: $ 240,000; under traditional $ 250,000.

I LOOK FOR EXPLAINATION AND SOLUTION:

Explanation / Answer

ABC Units/hours $ per unit Total Direct Materal & Direct labor       2,500.00            75.00 187,500.00 Overhead Machine hour       1,250.00            30.00     37,500.00 Set up              5.00       2,750.00     13,750.00 Inspection hour            50.00            25.00       1,250.00 Total cost 240,000.00 Per unit cost            96.00 Traditional Direct Materal & Direct labor       2,500.00            75.00 187,500.00 Overhead       1,250.00            50.00     62,500.00 Total cost 250,000.00 Per unit cost          100.00

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