three questions are based on the following: Rapp Company is considering switchin
ID: 2551452 • Letter: T
Question
three questions are based on the following: Rapp Company is considering switching to an activity-based costing (ABC) system. The company peoduces and sells two products: LoEnd and HiEnd. The company consists of two departments: Production (where the products are made) and Markcting (which engages in selling and admin activity). The company's traditional costing system computes unit product costs as by GAAP: direct labor hours (DLHs) are used as the allocation base for manufacturing overhead cost (the rounded to the nearest cent). The ABC system will include in unit costs all costs easily associated with units ABC system, there are four major indirect activities: Machine Setups, Special Processing, General (10% of Customer Relation cost relates to manufacturing and is incurred in the Production Department, he rest of the Casi r Relation cost is incurred in the Marketing Department). In the ABC system, Customer Relation costs will be associated with customers; the rest of the costs will be associated with units of the two products Factory, and Customer The prices, direct material cost (DM), shipping cost and DLHs below are given for one unit of the pro uct Product HiEnd LoEnd DM DLHs $72 $44 Price Hourly Shipping Units Wage-DL Cost $200 $150 5000 $20 $1 The company collected the data for ABC as follows: Estimated Activity measures used Activity Cost Pool Activity Measure # of setups Machine hours OH cost LoEnd HiEnd Total $360,000 Machine Setup Special Processing General Factory (excluding Customer Relation) Customer Relation 40 120 160 300,000 8,000 12,000 20,000 DLHs # of customers 144,000 200,000 4 What is the difference between the HiEnd product's unit costs computed by the traditional and ABC systems? A. Under the traditional costing system, the HiEnd unit cost is higher by B. Under the traditional costing system, the HiEnd unit cost is lower by C. Under the traditional costing system, the HiEnd unit cost is higher by S 5.00 per unit S 5.00 per unit. $ 8.00 per unit. S 8.00 per unit. CD Under the traditional costing system, the HiEnd unit cost is lower by E. None of the above
Explanation / Answer
Answer is E. None of above Explanaation Traditional OH rate: Estimated OH / Estimated DLH $ 1004,000 /(2*5000+1*6000)= $ 62.75 per hour OH cost per unit under traditional costing for HiEnd product (2 DLH @62.75): $125.50 per unit ABC costing: Activity rate Activities Measures OH Activity Rate machine Setup Setups 360000 160 2250 Special processing machine Hours 300000 20000 15 General factory DLH 144000 16000 9 OH assigned to Hi end and OH cost per unit: Machine Setup cost (120 setups @2250) 270000 Special Processing (12000 Mh @15) 180000 General Factory (10000 DLH @9) 90000 Total OH assigned 540,000 Divide: Number of untis 5000 OH cost per unit 108 Difference in unit cost: Unit cost under traditional 125.5 Unit cost under ABC 108 Increased cost under traditional 17.5
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