Petral Ltd. Manufactures 2 products, W and Z using the same factory and faciliti
ID: 2516503 • Letter: P
Question
Petral Ltd. Manufactures 2 products, W and Z using the same factory and facilities. Details provided below:
Production overhead is comprised of the following costs:
Description of cost Amount
Factory overhead related to machine activity- $42,725
Set-up costs- $8,725
Cost of handling materials- $11,725
Administration costs for spare parts- $12,725
The firm uses a plant-wide overhead rate based on Machine hours of $5.97 per machine hour.
However, an investigation of the activities (in addition to machine hours) that drive costs at the product-line level revealed the following relationships:
Required:
1) Verify the firm's plant-wide rate of $5.97 per machine hour. Show all relevant calculations.
2) Compute all appropriate overhead rates using activity based costing. Round off all individual overhead rates to two decimal places. Show all relevant calculations.
3) Apply (1) and (2) to 2 product lines: that is, calculate the amount of overhead that should be allocated to Product-lines W and Z under the plant-wide rate and ABC rates. Show all relevant calculations.
4) Compare the overhead allocations to product lines W and Z. Clearly explain the differences in allocated costs with respect to each product line: your explanation should first provide a theoretical explanation for the differences, and second, explain these differences by referring back to the case facts provided. This part requires a narration that explains any figures calculated to highlight differences in allocated amounts: students cannot just provide calculations without providing a detailed explanation. Please ensure that the answer is written in full sentences and using paragraphs. An answer with key words only, which are not developed into a reasoned argument, is not acceptable for second-year assignments.
Product Line Vol of Production Material (direct) cost per unit Direct labour per unit Machine time per unit Labour cost per unit W 600 $6 0.75hr 0.5hr $4 Z 7100 $18 1.25hrs 1.75hrs $10Explanation / Answer
Answer 1
Plantwide rate = Total Overheads/ Total Machine Hours
Total Overheads= 42725+8725+11725+12725= 75,900
Total Machine Hours = 600*.5+ 7100*1.75= 12,725
Plantwide rate per machine hr = 75,900/12,725= 5.964 per machine hr.So it is verified
2. Overhead Rates using Activity based costing
Set up rate= Set up Cost/No of set ups = 8,725/11 = 793.18 per set up
Material Handling rate= cost of handling material/ no of times materail handled= 11,725/16=732.81 each time
Spare part handling= cost/ no of spare parts=12,725/8 =1590.6 per part
Machine rate= Machine overheads/machine hrs= 42,725/12,725= 3.36 per hr
3. Overhead Cost calculations for product W and Z using Activity based costing
Cost for each product line = cost Material Handling + admn cost for spares + overheads for machine activity
Overhead cost per unit cost= Total cost as per above/ volume of production
W=( 2*793.18+3*732.81+3*1590.6+600*.5*3.36)/600
= $13542.59/600= $15.97 per unit
Z = ( 9*793.18+13*732.81+5*1590.6+7100*1.75*3.36)/7100
= $66366.15/7100= $9.34 per unit
4.Comparing costs calculated in part 1 based on machine hrs and and under Activity based costing is different. In both these cases costs under ABC is more. It means that product line is under costed based on machine hrs . It is better to use ABC costing to have more effective costs as compared to traditional method of costing.
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