Lyon Corporation has identified the following overhead costs and activity drivers for next year: Overhead Items Expected Costs Activity Drivers Expected Qty. Set-up costs Ordering costs Maintenance Power Rs.150,000 40,000 200,000 20,000 Number of set-ups Number of orders Machine hours Kilowatt hours 1,000 10,000 16,000 100,000 The following are two of the jobs completed during the year: Job XX Job YY Direct materials Rs.2,250 Rs.2,500 Direct labor Rs.3,000 Rs.1875 Units complete 375 300 Direct labor hours 90 110 Number of set-ups 6 8 Number of orders 8 15 Machine hours 180 150 Kilowatt hours 90 120 The company’s normal activity is 20,000 direct labor hours. Required: Determine the unit cost for each job using direct labor hours to apply overhead. Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimals). 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.
Question No.7
Lyon Corporation has identified the following overhead costs and activity drivers for next year:
|
Overhead Items |
Expected Costs |
Activity Drivers |
Expected Qty. |
|
Set-up costs Ordering costs Maintenance Power |
Rs.150,000 40,000 200,000 20,000 |
Number of set-ups Number of orders Machine hours Kilowatt hours |
1,000 10,000 16,000 100,000 |
The following are two of the jobs completed during the year:
Job XX Job YY
Direct materials Rs.2,250 Rs.2,500
Direct labor Rs.3,000 Rs.1875
Units complete 375 300
Direct labor hours 90 110
Number of set-ups 6 8
Number of orders 8 15
Machine hours 180 150
Kilowatt hours 90 120
The company’s normal activity is 20,000 direct labor hours.
Required:
- Determine the unit cost for each job using direct labor hours to apply overhead.
- Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimals).
- Which method produces the more accurate cost assignment? Why?
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