Accounting (Managerial) 530

Revision New costing methods

Curtin Business School 1/10
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New costing methods

Question 1:

The accountant for Scenic Photographic Supply Company has established the following
overhead cost pools and activity drivers.

Overhead Cost Budgeted overhead
Pool Cost Activity Driver
Machine set-ups $100,000 Number of setups
Material handling $50,000 Weight of raw material
Hazardous waste control 25,000 Weight of hazardous
chemicals used
Quality control inspection 37,500 Number of inspections
Other overhead costs 100,000 Machine hours
Total $312,500

Overhead Cost
Pool
Budgeted Level for activity
Driver

Overhead Rate

Machine set-ups 100 $1,000 per setup
Material handling 50,000 kilos $1 per kilo
Hazardous waste control 10,000 kilos $2.50 per kilo
Quality control inspection 1,000 $37.50 per inspection
Other overhead costs 20,000 $5 per machine hour

An order for 1,000 boxes of film development chemicals has the following production
requirements:

Accounting (Managerial) 530
Revision New costing methods
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Machine set-ups 4 Set-ups
Raw material l0,000 kilos
Hazardous materials 2,000 kilos
Inspections 10 inspections
Machine hours 500 machine hours

REQUIRED:

1. Calculate the total overhead that should be assigned to the development chemical
order.

2. What is the overhead cost per box of chemicals?

3. Suppose Scenic Photographic Supply Company were to use a single, predetermined
overhead rate based on machine hours. Calculate the rate per hour.

4. Using the single plantwide rate, what is the total overhead assigned and the overhead
cost per box of chemicals?

5. Discuss the merits of an activity-based overhead costing system.















Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 3/10
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Question 1 Solution:

1. Overhead to be assigned to film development chemical order:

Assigned
Overhead Cost Predetermined Level of Overhead
Pool Overhead Rate Cost Driver

Machine set-ups $1,000 per setup 4 setups 4,000
Material handling $1 per kilo 10,000 kilo 10,000
Hazardous waste
control
$2.50 per kilo 2,000 kilo 5,000
Quality Control $37.50 per
inspection
10 inspections 375
Other overhead costs $5 per machine
hour
500 machine hrs 2,500
Total $21,875

2. Overhead cost per box of chemicals $21,875/1,000 boxes = $21.875 per box
3. Predetermined Overhead = total budgeted overhead cost $312,500/total budgeted
machine hours 20,000 rate
= $15.625 per hour

4. Overhead to be assigned to film development chemical order, given a single
predetermined overhead rate:
a. Overhead assigned = $15.63 per machine hour x 500 machine hours
= $7,815 in total

b. Overhead cost per box of chemicals =$7,815/1,000 boxes = $7.815 per box

5. The film development chemicals entail a relatively large number of machine setups, a
large amount of hazardous materials, and several inspections. Thus, they are quite
costly in terms of driving overhead costs. Use of a single predetermined overhead rate
obscures this characteristic of the production job. Under-estimating the overhead cost
per box could have serious adverse consequences for Scenic. For example, it could lead
to poor decisions about product pricing. The activity-based overhead costing system will
enhance Scenics management much better than a system based on a single,
predetermined overhead rate.

Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 4/10
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Question 2:

The Noosa Bicycle Co Pty Ltd manufactures two types of bikesamateur and
professional. The company uses activity-based costing to allocate overhead costs to each
product. The following information has been provided:
Qty Direct DLH Direct
Product
Produced
Materials used Labour cost
Amateur 200 $90 400 $4,000
Professional 100 120 300 3,000

No of times No of No of design No of
Product handled parts changes Setups
Amateur 20 10 6 5
Professional 30 15 9 7

The total overhead costs were:
Handling $5,000
No of parts 6,500
Design changes 1,800
Setups 1,500
Total $ 14,800

REQUIRED:

1. Calculate the unit cost for each product using activity-based costing.

2. Calculate the unit cost for each product using direct labour hours as the basis for
applying overhead.






Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 5/10
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Question 2 Solution:

1. Overhead application rates:
Handling $5,000/50 = $100 per handle
No of parts 6,500/25 = 260 per part
Design
changes
1,800/15 = 120 per design change
No of set-
ups
1,500/12 = 125 per set-up

Overhead application:
Amateur Professional
Handling 2,000 3,000
No of parts 2,600 3,900
Design changes 720 1,080
No of setups 625 875


$5,945 $8,855
Cost per unit:
Amateur Professional
Direct materials $90 $120
Direct labour 20 30
Overhead 5945/200 30
8855/100 ______ 89


$ 140 $ 239
2. Overhead application rate:
14,800/700 = $21 per direct labour hour (to nearest $)
Cost per unit:
Amateur Professional
Direct materials $90 $120
Direct labour 20 30
Overhead (21 x
400)/200
42
(21 x 306)/100 ______

63
$152 $213

Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 6/10
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Question 3

Flyer Corporation manufactures two products, Product A and Product B. Product B is of
fairly recent origin, having been developed as an attempt to enter a market closely
related to that of Product A. Product B is the more complex of the two products,
requiring three hours of direct labor time per unit to manufacture compared to one and
one-half hours of direct labor time for Product A. Product B is produced on an
automated production line.

Overhead is currently assigned to the products on the basis of direct-labor hours. The
company estimated it would incur $396,000 in manufacturing overhead costs and
produce 5,500 units of Product B and 22,000 units of Product A during the current
year. Unit costs for materials and direct labor are:

Product A Product B
Direct material ...... $9 $20
Direct labor ......... $7 $15


REQUIRED:
1. Compute the predetermined overhead rate under the current method of allocation
and determine the unit product cost of each product for the current year.

2. The company's overhead costs can be attributed to four major activities. These
activities and the amount of overhead cost attributable to each for the current year
are given below:

Estimated Expected Activity
Overhead Product Product
Activity Cost Pools Costs A B Total
Machine setups required ... $170,000 700 1,000 1,700
Purchase orders issued .... 37,000 300 200 500
Machine-hours required .... 91,000 4,000 9,000 13,000
Maintenance requests issued 98,000 400 600 1,000
$396,000

Using the data above and an activity-based costing approach, determine the unit product
cost of each product for the current year.


















Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 7/10
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Question 3 solution


1. The company expects to work 45,000 direct labor-hours during the current
year, computed as follows:

Product A: 22,000 units x 1.5 hr. ..... 33,000 hours
Product B: 5,500 units x 3.0 hrs. .... 16,500 hours
Total direct labor-hours ............... 49,500 hours

Using these hours as a base, the predetermined overhead using direct labor-hours
would be:

Pred. ovhd. rate = $396,000 49,500 DLHs = $8.00/DLH

Using this overhead rate, the unit product cost of each product would be:

Product Product
A___ B
Direct materials ............. $ 9 $20
Direct labor ................. 7 15
Manufacturing overhead:
Product A-1.5 hour ......... 12
Product B-three hours ...... 24
Total ........................ $28 $59


2. The overhead rates are computed as follows:

Estimated Total
Overhead Expected
Activity Cost Pools Costs Activity Rate
Machine setups ....... $170,000 1,700 $100/setup
Purchase orders ...... 37,000 500 74/order
Machine-hours ........ 91,000 13,000 7/hour
Maintenance requests . 98,000 1,000 98/request
$396,000


The overhead cost attributable to each product is:

Product A Product B
Activity Amount Activity Amount
Machine setups,
$100.00/setup ....... 700 $ 70,000 1,000 $100,000
Purchase orders,
$74.00/order ........ 300 22,200 200 14,800
Machine-hours,
$7.00/hour 4,000 .. 28,000 9,000 63,000
Maintenance request,
at $98.00/request ... 400 39,200 600 58,800
$159,400 $236,600
Overhead cost per unit:



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Revision New costing methods
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Product A: $159,400 22,000 units = $7.2455/unit.
Product B: $236,600 5,500 units = $43.0182/unit.

Using activity-based costing, the unit product cost of each product would be:

Product A Product B
Direct materials .............. $ 9.0000 $20.0000
Direct labor .................. 7.0000 15.0000
Manufacturing overhead ........ 7.2455 43.0182
Total unit product cost .... $23.2455 $78.0182



























Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 9/10
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Question 4:

Daba Company manufactures two products, Product F and Product G. The company
expects to produce and sell 1,400 units of Product F and 1,800 units of Product G
during the current year. The company uses activity-based costing to compute unit
product costs for external reports. Data relating to the companys three activity cost
pools are given below for the current year:

Estimated
Activity Overhead Expected Activity
Cost Pool Costs Product F Product G

Total
Machine setups $10,800 80 100
180
Purchase orders $77,520 510 1,010
1,520
General factory $75,920 2,240 3,600
5,840


Required:

Using the activity-based costing approach, determine the overhead cost per unit for
each product.


















Accounting (Managerial) 530
Revision New costing methods
Curtin Business School 10/10
10/10


Question 4 solution

The overhead rates for each activity center are as follows:

Estimated
Activity Overhead Expected Overhead
Cost Pool Costs Activity Rate
Machine setups $10,800 180 $60.00
Purchase orders $77,520 1,520 $51.00
General factory $75,920 5,840 $13.00


The overhead cost charged to each product is:

Product F Product G
Activity Amount Activity Amount
Machine setups 80 $ 4,800 100 $ 6,000
Purchase orders 510 26,010 1,010 51,510
General factory 2,240 29,120 3,600

46,800
Total overhead cost $59,930 $104,310

Overhead cost per unit:

Product F: $59,930 1,400 units = $42.81 per unit.
Product G: $104,310 1,800 units = $57.95 per unit