1. McNeil\'s original single plantwide overhead allocation rate costing system a

Question

1. McNeil's original single plantwide overhead allocation rate costing system allocated indirect costs to products at $140.00 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places. Compute the predetermined overhead allocation rate for each activity. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.) 2. 3. 4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.

Explanation / Answer

1 Computation of Indirect cost allocated 420000 Allocation of indirect cost to Commercial containers & Travel packs per unit Commercial container Travel pack Total No. of hours 2240 510 Overhead allocation rate 140 140 allocated manufactured overhead 313600 71400 Units produced 2800 51000 per unit indirect cost allocated 112 1.4 2 Predetermined allocation rate for each activity Unit of Measurement Quanity Allocation rate for each activity Material Handling 96000 Kilos 24000 4 Packaging 210000 Machine hours 3000 70 Quality assurance 114000 No. of samples 1900 60 3 Computation of total activity based costs allocated to each product line Activity rate Consumption of activity Commercial containers Consumption of activity Travel pack Material Handling 4 14000 56000 10200 40800 Packaging 70 2240 156800 510 35700 Quality assurance 60 560 33600 765 45900 Total 246400 122400 Units produced 2800 51000 per unit 88 2.4 4 Comparasion of above two methods Overhead allocation Method Commercial container Travel pack Original System 112 1.4 Activity based costing system 88 2.5 Change in Unit cost Decrease Increase by 24 1.1 Because of change in method of allocation of overhead rate. Activity Based costing contains No.s of activity cost driver of whereas in original costing overhead allocation rate is based on single Activity cost drivers

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