eBook Calculator Print Item Activity-Based Costing and Product Cost Distortion D
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Activity-Based Costing and Product Cost Distortion
Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $386,400.
Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.
The following information about cell phones and tablet PCs was determined from the corporate records:
If required, round your answers to the nearest cent.
a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.
b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.
c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.
d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?
The per-unit indirect labor costs in (a) are distorted because is consumed by the products in a different ratio from the direct labor. The costing method results in the product with the number of setups receiving a larger portion of the setup activity cost. The allocates overhead only on the basis of direct labor hours. Since the direct labor hours equal for each product, the allocated indirect labor will also equal.
Number ofSetups Direct Labor
Hours Units Cell phones 500 2,000 84,000 Tablet PCs 1,100 2,000 84,000 Total 1,600 4,000 168,000
Explanation / Answer
Req d:
The perunit indirect cost in ABC costing are distorted because activity cost is consumed in product in a differnt rtio from the direct labour. The ABC costing method results in a product with the number of setups receciving a larger portion of setup activity cost. Th Traditional costing allocates overheads only on the basis of direct labour horus. Since the direct labur hours are equal for each poduct, theh allocated indirrect labour will also be equal.
Req a. Pre-determined OH rate: Estimated overheads / DLH ($ 386,400 / 4,000 DLH) = $ 96.60 per DLH Overheads cost per unit: DLH OH rate OH assigned UNIts OH cost per UNIT Cell phone 2000 96.6 193200 84000 2.3 Tablet 2000 96.6 193200 84000 2.3 Req b: Activity Cost Activity measures Activity rate Setup 154560 1600 Setups 96.6 per setup Support 231840 4000 DLH 57.96 per DLH Req c: CELL PHONE TABLET Activity Rate Activity Amount Activity Amount Setup 96.6 500 48300 1100 106260 Ssupport 57.96 2000 115920 2000 115920 Total OH 164220 222180 Number of units 84000 84000 OH cost per unit 1.955 2.645 OH cost per unt Cell phone 1.955 Tablet 2.645Related Questions
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