Case Assignment Beautifully Fabulous Beauty Salon manufactures two products, Bea
ID: 2491490 • Letter: C
Question
Case Assignment
Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Cocooning Spray. Beauty Gloss is produced on an automated production line.
Overhead currently is applied to the products on the basis of direct labor hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Beauty Gloss and 40,000 units of Cocooning Spray during the current year.
Unit costs for materials and labor are:
Cocooning Spray
Beauty Gloss
Direct material
$11
$24
Direct labor
6
12
The following items will be assessed in particular:
Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below:
Estimated
Expected Activity
Overhead
Cocooning
Beauty
Activity Cost Pool
Costs
Spray
Gloss
Total
Machine setups required
$204,000
800
1,600
2,400
Purchase orders issued
43,500
500
100
600
Machine-hours required
105,000
7,000
10,500
17,500
Maintenance requests issued
157,000
650
850
1,500
$510,000
Using the data above, determine the unit product cost of each product for the current year.
What items of overhead cost make Beauty Gloss so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Beauty Gloss?
Cocooning Spray
Beauty Gloss
Direct material
$11
$24
Direct labor
6
12
Explanation / Answer
predetermined overhead rate= manufacturing overhead cost/direct labour hours
direct labour hours=(10,000*2)+(40,000*1)=60,000
=510,000/60,000= $8.5 per labour hr
Product cost of cocooning= direct labour+direct labour+mfg overhead
=11+6+(8.5*1)=$25.5
Product cost of beauty= direct labour+direct labour+mfg overhead
=24+12+(8.5*2)=$53
ABC costing:
-----------
Machine setup required= 204,000/2400=$85 per pool
Purchse order issued=43,500/600=$72.4 per issue
machien hrs required=105,000/17,500=$6 per hr
maintenance request issued=157500/1500=$105 per request
Cocooning cost=(800*85)+(500*72.5)+(7000*6)+(650*105)=214,500
beauty gloss=(1600*85)+(100*72.5)+(10500*6)+(850*105)=295,500
Product cost of cocooning= direct labour+direct labour+mfg overhead
=11+6+(214500/40000)=$22.36
Product cost of beauty= direct labour+direct labour+mfg overhead
=24+12+(295500/10000)=$65.55
Machine setup has taken major cost for beauty gloss and it is (1600*85)=$136,000
By applying ABC cost the overhead cost are accurately assigned different products by which pricing of the product can be done effectively and both the products can be profitable
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