Chapter 17: Q15DQ (page 787)
What are the four activity levels associated with activity based costing? Define each.
Unit-level activities, batch-level activities, product-level activities, and facility-level activities are all levels of activity-based costing.
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In what way are departmental overhead rates similar to a single plantwide overhead rate? How are they different?
1. If management wants the most accurate product cost, which of the following costing methods should be used?
2. Which costing method tends to overstate the cost of high-volume products?
3. Disadvantages of activity-based costing include
Question: Refer to the information in Exercise 17-7 to answer the following requirements.
Required
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are \(250 for Model 145 and \)180 for Model 212.
3. If the market price for Model 145 is \(820 and the market price for Model 212 is \)480, determine the profit or loss per unit for each model. Comment on the results.
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
Xylon Company manufactures custom-made furniture for its local market and produces a line of home furnishings sold in retail stores across the country. The company uses traditional volume-based methods of assigning direct materials and direct labor to its product lines. Overhead has always been assigned by using a plantwide overhead rate based on direct labor hours. In the past few years, management has seen its line of retail products continue to sell at high volumes, but competition has forced it to lower prices on these items. The prices are declining to a level close to its cost of production. Meanwhile, its custom-made furniture is in high demand, and customers have commented on its favourable (lower) prices compared to its competitors. Management is considering dropping its line of retail products and devoting all of its resources to custom-made furniture.
Required
1. What reasons could explain why competitors are forcing the company to lower prices on its highvolume retail products?
2. Why do you believe the company charges less for custom-order products than its competitors?
3. Does a company’s costing method have any effect on its pricing decisions? Explain.
4. Aside from the differences in volume of output, what production differences do you believe exist between making custom-order furniture and mass-market furnishings?
5. What information might the company obtain from using ABC that it might not obtain using volume-based costing methods?
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