Chapter 5 Example Dollar Corporation has the following predicted indirect costs

Question

Chapter 5 Example Dollar Corporation has the following predicted indirect costs and cost drivers for 2016 for the given activity cost pools Fabrication Department Finishing Department $71,000 Polishing Materials handling 30,000 Engineering Inspections $61,000 15,000 5,000 25,000 Cost Driver Machine hours Material moves Machine setups Inspection hours 70,000 $171,000 $106,000 The following activity predictions were also made for the year: Fabrication Department Finishing Department Machine hours 10,000 Material moves 3,000 Machine setups 700 Inspection hours - 5,000 1,500 50 1,000 It is assumed that the cost per unit of activity for a given activity does not vary between departments. Dollar's president, Charles Dollar, is trying to evaluate the company's product mix strategy regarding two of its five product models, ZX300 and SL500. The company has been using a company-wide overhead rate based on machine hours but is considering switching to either department rates or activity-based rates. The production manager has provided the following data for the production of a batch of 100 units for each of these models: ZX300 SL500 $11,000 $17,000 $5,000 $4,000 Direct materials cost Direct labor cost Machine hours (Fabrication) 500 Machine hours (Finishing) 200 Materials moves Machine setups Inspection hours 700 100 30 5 30 60

Explanation / Answer

1) Calculation of Production Cost for 100 units :-

Working Note :-

Overhead Rate Per Machine Hour :-

Total Budgeted Overhead = ($171000 + $106000) = $277000

Total Budgeted Labour Hours = (10000 + 5000) = 15000 hours

= $277000 / 15000H

= $18.47

2) Calculation of Production Cost for 100 units :-

Working Note :-

Overhead Rate = Cost / Machine hours

Fabrication Dept. = $171000 / 10000 = $17.1

Finishing Dept. = $106000 / 5000 = $21.2

3) Calculation of Production Cost for 100 units :-

Activity Based Overhead Rates :-

Particulars ZX300 SL500 Direct Material $11000 $17000 Direct Labour Cost $5000 $4000 Fabrication Dept Cost @ $18.47 $9235 $12929 Finishing Dept Cost @ $18.47 $3694 $1847 Total Cost $28929 $35776 Cost per unit $289.29 $357.76

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