Chapter 17: Q12DQ (page 787)
What is the first step in applying activity-based costing?
In the activity-based pricing technique, the most important task is activity identification.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for 2017 follow.
Molding | Trimming | |
Direct labor hours | 52,000 DLH | 48,000 DLH |
Machine hours | 30,500 MH | 3,600 MH |
Overhead costs | \(730,000 | \)590,000 |
Data for two special order parts to be manufactured by the company in 2017 follow.
Part A27C | Part X82B | |
Number of units | 9,800 units | 54,500 units |
Machine hours | ||
Molding | 5,100 MH | 1,020 MH |
Trimming | 2,600 MH | 650 MH |
Direct labor hours | ||
Molding | 5,500 DLH | 2,150 DLH |
Trimming | 700 DLH | 3,500 DLH |
Required
Question: Tent Pro produces two lines of tents sold to outdoor enthusiasts. The tents are cut to specifications in department A. In department B, the tents are sewn and folded. The activities, costs, and drivers associated with these two manufacturing processes and the company’s production support activities follow.
Process Activity Overhead Cost Driver Quantity
Department A Pattern alignment \( 64,400 Batches 560
Cutting 50,430 Machine hours 12,300
Moving product 100,800 Moves 2,400
\)215,630
Department B Sewing \(327,600 Direct labor hours 4,200
Inspecting 24,000 Inspections 600
Folding 47,880 Units 22,800
\)399,480
Support Design \(280,000 Modification orders 280
Providing space 51,600 Square feet 8,600
Materials handling 184,000 Square yards 920,000
\)515,600
Additional production information on the two lines of tents follows.
Pup Tent Pop-up Tent
Units produced……………. 15,200 units 7,600 units
Moves …………………….... 800 moves 1,600 moves
Batches ………………….... 140 batches 420 batches
Number of inspections .... 240 inspections 360 inspections
Machine hours …….......... 7,000 MH 5,300 MH
Direct labor hours ……… 2,600 DLH 1,600 DLH
Modification orders …… 70 modification orders 210 modification orders
Space occupied ……….. 4,300 square feet 4,300 square feet
Material required ……… 450,000 square yards 470,000 square yards
Required
1. Using a plantwide overhead rate based on direct labor hours, compute the overhead cost that is assigned to each pup tent and each pop-up tent.
2. Using the plantwide overhead rate, determine the total cost per unit for the two products if the direct materials and direct labor cost is \(25 per pup tent and \)32 per pop-up tent.
3. If the market price of the pup tent is \(65 and the market price of the pop-up tent is \)200, determine the gross profit per unit for each tent. What might management conclude about the pup tent?
4. Using ABC, compute the total cost per unit for each tent if the direct labor and direct materials cost is \(25 per pup tent and \)32 per pop-up tent.
5. If the market price is \(65 per pup tent and \)200 per pop-up tent, determine the gross profit per unit for each tent. Comment on the results.
6. Would your pricing analysis be improved if the company used, instead of ABC, departmental rates determined using machine hours in department A and direct labor hours in department B? Explain.
Explain why a single plantwide overhead rate can distort the cost of a particular product.
The usefulness of a single plantwide overhead rate is based on two assumptions. What are those assumptions?
What are the advantages of using a single plantwide overhead rate?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
