Gee Manufacturing produces two models of camshafts used in the production of automobile engines: Regular and High Performance. Gee currently uses an ABC system to assign costs to the two products. For the coming year, the company has the following overhead activities, costs, and activity drivers: activity expected cost activity driver activity capacity setups $214,612 set up hours 10,000 machining $420,000 machine hours 20,000 moving $112,500 move hours 5,000 total overhead $747,112 At practical capacity, the expected activity demands for each product are as follows: regular performance model high performance model units completed 30,000 8,000 set up hours 8,000 2,000 machine hours 6,000 14,000 moving hours 1,000 4,000 The production cycle time for the regular performance camshaft is 0.50 (hours per unit) and that of the high performance camshaft is 2.5 (hours per unit). Required: 1. Calculate the total and per unit overhead assigned to each model using DBC (assume you only know cycle time, total overhead costs, and units at practical capacity). Round the overhead rate to four decimal places and the per unit overhead cost to two decimal places. How do the cost assignments compare to those of ABC? 2. Explain to Gee why DBC might be a better choice for assigning overhead costs.
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.
Gee Manufacturing produces two models of camshafts used in the production of automobile engines: Regular and High Performance. Gee currently uses an ABC system to assign costs to the two products.
For the coming year, the company has the following
| activity | expected cost | activity driver | activity capacity |
|
setups |
$214,612 | set up hours | 10,000 |
| machining | $420,000 | machine hours | 20,000 |
| moving | $112,500 | move hours | 5,000 |
| total overhead | $747,112 |
At practical capacity, the expected activity demands for each product are as follows:
| regular performance model | high performance model | |
| units completed | 30,000 | 8,000 |
| set up hours | 8,000 | 2,000 |
| machine hours | 6,000 | 14,000 |
| moving hours | 1,000 | 4,000 |
The production cycle time for the regular performance camshaft is 0.50 (hours per unit) and that of the high performance camshaft is 2.5 (hours per unit).
Required:
1. Calculate the total and per unit overhead assigned to each model using DBC (assume you only know cycle time, total overhead costs, and units at practical capacity). Round the overhead rate to four decimal places and the per unit overhead cost to two decimal places. How do the cost assignments compare to those of ABC?
2. Explain to Gee why DBC might be a better choice for assigning overhead costs.
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