Chapter 17: Q5DQ (page 787)
The usefulness of a single plantwide overhead rate is based on two assumptions. What are those assumptions?
Multiple allocations and various sections of the organization are the assumptions followed by the plantwide overhead rate.
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Cardiff and Delp is an architectural firm that provides services for residential construction projects. The following data pertain to a recent reporting period.
Activities Costs
Design department
Client consultation ……………………….. 1,500 contact hours \( 270,000
Drawings …………………………………… 2,000 design hours 115,000
Modeling …………………………………… 40,000 square feet 30,000
Project management department
Supervision ………………………………… 600 days \)120,000
Billing ……………………………………….. 8 jobs 10,000
Collections ………………………………… 8 jobs 12,000
Required
1. Using ABC, compute the firm’s activity overhead rates. Form activity cost pools where appropriate.
2. Assign costs to a 9,200-square-foot job that requires 450 contact hours, 340 design hours, and 200 days to complete.
SP 17 After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.
Activity Cost Driver
Setting up machines ……………….. \( 20,000 25 batches
Inspecting components …………… \) 7,500 5,000 parts
Providing utilities …………………… \( 10,000 5,000 machine hours
Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 615.
Direct materials ……………………………………….. \)2,500
Direct labor …………………………………………….. $3,500
Batches …………………………………………………. 2 batches
Number of parts ……………………………………….. 400 parts
Machine hours …………………………………………. 600 machine hours
Required
1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.
2. What is the total cost of Job 615 if Business Solutions applies overhead at 50% of direct labor cost?
3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?
4. Which approach to assigning overhead gives a better representation of the costs incurred to produce Job 615? Explain.
The following data are for the two products produced by Tadros Company.
Product A Product B
Direct materials …………………… \(15 per unit \)24 per unit
Direct labor hours ………………… 0.3 DLH per unit 1.6 DLH per unit
Machine hours …………………….. 0.1 MH per unit 1.2 MH per unit
Batches ……………………………... 125 batches 225 batches
Volume ………………………………. 10,000 units 2,000 units
Engineering modifications ……….. 12 modifications 58 modifications
Number of customers ……………… 500 customers 400 customers
Market price ………………………….. \(30 per unit \)120 per unit
The company’s direct labor rate is \(20 per direct labor hour (DLH). Additional information follows.
Costs Driver
Indirect manufacturing
Engineering support …………………… \)24,500 Engineering modifications
Electricity ………………………………… 34,000 Machine hours
Setup costs ……………………………… 52,500 Batches
Nonmanufacturing
Customer service ………………………. 81,000 Number of customers
Required
1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct labor hours. What is the gross profit per unit?
2. How much gross profit is generated by each customer of Product A using the plantwide overhead rate? How much gross profit is generated by each customer of Product B using the plantwide overhead rate? What is the cost of providing customer service to each customer? What information is provided by this comparison?
3. Determine the manufacturing cost per unit of each product line using ABC. What is the gross profit per unit?
4. How much gross profit is generated by each customer of Product A using ABC? How much gross profit is generated by each customer of Product B using ABC? Is the gross profit per customer adequate?
5. Which method of product costing gives better information to managers of this company? Explain why.
What are three common methods of assigning overhead costs to a product?
In what way are departmental overhead rates similar to a single plantwide overhead rate? How are they different?
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