Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year. Activity Expected Cost Activity Driver Activity Capacity Setting up equipment $480,000 Number of setups 600 Ordering costs 360,000 Number of orders 18,000 Machine costs 840,000 Machine hours 42,000 Receiving 400,000 Receiving hours 10,000 Deoro produces two models of dishwashers with the following expected prime costs and activity demands: Model A Model B Direct materials $600,000 $800,000 Direct labor $480,000 $480,000 Units completed 16,000 8,000 Direct labor hours 6,000 2,000 Number of setups 400 200 Number of orders 6,000 12,000 Machine hours 24,000 18,000 Receiving hours 3,000 7,000 The company's normal activity is 8,000 direct labor hours. Required: Determine the unit cost for each model using direct labor hours to apply overhead. Determine the unit cost for each model using the four activity drivers. Which method produces the more accurate cost assignment? Why?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year.
|
Activity |
Expected Cost |
Activity Driver |
Activity Capacity |
|
Setting up equipment |
$480,000 |
Number of setups |
600 |
|
Ordering costs |
360,000 |
Number of orders |
18,000 |
|
Machine costs |
840,000 |
Machine hours |
42,000 |
|
Receiving |
400,000 |
Receiving hours |
10,000 |
Deoro produces two models of dishwashers with the following expected prime costs and activity demands:
|
|
Model A |
Model B |
|
Direct materials |
$600,000 |
$800,000 |
|
Direct labor |
$480,000 |
$480,000 |
|
Units completed |
16,000 |
8,000 |
|
Direct labor hours |
6,000 |
2,000 |
|
Number of setups |
400 |
200 |
|
Number of orders |
6,000 |
12,000 |
|
Machine hours |
24,000 |
18,000 |
|
Receiving hours |
3,000 |
7,000 |
The company's normal activity is 8,000 direct labor hours.
Required:
- Determine the unit cost for each model using direct labor hours to apply overhead.
- Determine the unit cost for each model using the four activity drivers.
- Which method produces the more accurate cost assignment? Why?
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