Question 1opts Carson Weeks has been studying his department\'s profitablility r

Question

Question 1opts Carson Weeks has been studying his department's profitablility reports for the past six course and is beginning to question the company's approach to allocating overhe department overhead budget of $850,000 Is based on 40,000 machine hours. In an initial analysis of overhead costs, Carson has identified the following activity cost pools He has just completed a managerial accounting products based on machine hours. The current Budact 5000081025 Cost Pool Product assembly Machine setup and calibration Product Inspection Raw materials storage Expected Cost Expected Activitles 40,000 Machine hours retup an cabration $ 260,0000 2.00 euro,o 280,000 2,000 setups 140 120,000 100,000 500,000 pounds -po. 1,500 batches 80 $850,000 Carson Weeks is taking the next step in his exploration of activity-based costing and wants to examine the overhead costs that would be allocated to two of the department's four products. He has gathered the following budget information about each product Component Component Driver Usage 3F5 T76 Machine hours Setups Batches Pounds of raw materials 1,000 40 20 10,000 10,000 20 10 10,000 T76 Crson Wees found that the budget Induoded productio of oo unts of.comonentars nd s,00 units af Component (a) Calculate the overhead cost per unit of Component 3F5 and Component T76 under traditional costing using machine hours as the overhead application base. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 2 decimal places,e.g.52.75 Component 3F5 Component T76 Overhead cost per unit (b) Calculate the overhead cost per unit of Component 3F5 and Component T76 underactivity-based costing. (Round overhead rates to 2 decimal places, e.g. 5.27 and round final answers to 2 decimal places,e.g.52.75. Component 3F5 Component T76 Overhead per unit

Explanation / Answer

Solution:

Part a – Overhead Per Unit under traditional costing system

Total Estimated Overhead Cost = $850,000

Allocation base = Estimated Machine Hours = 40,000 MHs

Overhead Allocation Rate = Total Estimated Overhead Cost / Estimated Machine Hours = $850,000 / 40,000 = $21.25 per machine hour

Calculation of Overhead Per Unit for each component

Component 3FS

Component T76

Total Machine Hours (a)

1000

10000

Overhead Allocation Rate (b)

$21.25

$21.25

Total Allocated Overhead Costs (c = a*b)

$21,250

$212,500

Total Budgeted Production Units (d)

500 Units

5,000 Units

Overhead Cost Per Unit (c/d)

$42.50

$42.50

Part b – Overhead Cost per unit using activity based costing

Activity Based Costing System

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity)

Activities

Total Expected Overhead Cost

Expected Activities

Cost per Activity

(a)

(b)

(a/b)

Product Assembly

$350,000

40000

Machine hours

$8.75

per MH

Machine Setup and calibration

$280,000

2000

setups

$140.00

per setup

Product Inspection

$120,000

1500

batches

$80.00

per batch

Raw materials storage

$100,000

500000

pounds

$0.20

per pound

$850,000

Component 3FS

Component T76

Activities

Rate per Cost driver Unit

Activity Consumed

Allocated Overhead Cost

Activity Consumed

Allocated Indirect Cost

(a)

(b)

(a*b)

(s)

(a*s)

Product Assembly

$8.75

1000

$8,750

10000

$87,500

Machine Setup and calibration

$140

40

$5,600

20

$2,800

Product Inspection

$80

20

$1,600

10

$800

Raw materials storage

$0.20

10000

$2,000

10000

$2,000

Allocated Overhead Costs (S)

$17,950

$93,100

Total Budgeted Production Units (P)

500 Units

5,000 Units

Allocated Overhead Cost per unit (S/P)

$35.90

$18.62

Summary of above solutions:

Component 3FS

Component T76

(a)

Overhead Cost Per Unit (Traditional Costing)

$42.50

$42.50

(b)

Overhead Cost Per Unit (Activity Based Costing)

$35.90

$18.62

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Component 3FS

Component T76

Total Machine Hours (a)

1000

10000

Overhead Allocation Rate (b)

$21.25

$21.25

Total Allocated Overhead Costs (c = a*b)

$21,250

$212,500

Total Budgeted Production Units (d)

500 Units

5,000 Units

Overhead Cost Per Unit (c/d)

$42.50

$42.50

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