Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and page 599it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz’s controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars): Basic Advanced Total Number of units produced and sold 20,000 10,000 30,000 Sales $3,000,000 $2,000,000 $5,000,000 Cost of goods sold 2,300,000 1,350,000 3,650,000 Gross margin 700,000 650,000 1,350,000 Selling and administrative expenses 720,000 480,000 1,200,000 Net operating income (loss) $ (20,000) $ 170,000 $ 150,000 Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assemble and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information: Molding Assemble and Pack Total Manufacturing overhead costs $787,500 $562,500 $1,350,000 Direct labor-hours: Basic 10,000 20,000 30,000 Advanced 5,000 10,000 15,000 Machine-hours: Basic 12,000 - 12,000 Advanced 10,000 - 10,000 Required: Using the plantwide approach: Calculate the plantwide overhead rate. Calculate the amount of overhead that would be assigned to each product. Using a departmental approach: Calculate the departmental overhead rates.
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.
INTEGRATION EXERCISE 4 Plantwide and Departmental Overhead Allocation; Activity-Based Costing; Segmented Income Statements LO3–1, LO3–2, LO3–3, LO3–4, LO4–4, LO4–5, LO5–1, LO5–3, LO5–4
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and page 599it uses plantwide
|
|
Basic |
Advanced |
Total |
|
Number of units produced and sold |
20,000 |
10,000 |
30,000 |
|
Sales |
$3,000,000 |
$2,000,000 |
$5,000,000 |
|
Cost of goods sold |
2,300,000 |
1,350,000 |
3,650,000 |
|
Gross margin |
700,000 |
650,000 |
1,350,000 |
|
Selling and administrative expenses |
720,000 |
480,000 |
1,200,000 |
|
Net operating income (loss) |
$ (20,000) |
$ 170,000 |
$ 150,000 |
|
|
|
|
|
Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assemble and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:
|
|
Molding |
Assemble and Pack |
Total |
|
Manufacturing overhead costs |
$787,500 |
$562,500 |
$1,350,000 |
|
Direct labor-hours: |
|
|
|
|
Basic |
10,000 |
20,000 |
30,000 |
|
Advanced |
5,000 |
10,000 |
15,000 |
|
Machine-hours: |
|
|
|
|
Basic |
12,000 |
- |
12,000 |
|
Advanced |
10,000 |
- |
10,000 |
|
|
|
|
|
Required:
-
Using the plantwide approach:
-
Calculate the plantwide overhead rate.
-
Calculate the amount of overhead that would be assigned to each product.
-
-
Using a departmental approach:
-
Calculate the departmental overhead rates.
-
Calculate the total amount of overhead that would be assigned to each product.
-
Using your departmental overhead cost allocations, redo the controller’s segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).
-
-
Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to five activity cost pools as follows:
Activity Cost Pool
Activity Measure
Manufacturing Overhead
Machining
Machine-hours in Molding
$ 417,500
Assemble and pack
Direct labor-hours in Assemble and Pack
282,500
Order processing
Number of customer orders
230,000
Setups
Setup hours
340,000
Other (unused capacity)
80,000
$1,350,000
page 600
She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the company’s selling and administrative costs are organization-sustaining in nature.
Using the additional information provided by the production manager, calculate:
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An activity rate for each activity cost pool.
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The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach.
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The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.
-
-
Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 4–8. (Hint: Organize all of the company’s costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)
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Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.
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Explain how Koontz’s activity-based costing approach differs from its plantwide and departmental approaches.
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