Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A’s production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products:  Product Data Model AModel BUnits produced per year10,000100,000Prime costs$150,000$1,500,000Direct labor hours140,000300,000Machine hours20,000200,000Production runs4060Inspection hours8001,200Maintenance hours10,00090,000Overhead costs:       Setup costs$270,000      Inspection costs$210,000      Machining$240,000      Maintenance$270,000      Total$990,000 Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

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Asked Nov 27, 2019
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Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A’s production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products:

 

 

Product Data

 

Model A

Model B

Units produced per year

10,000

100,000

Prime costs

$150,000

$1,500,000

Direct labor hours

140,000

300,000

Machine hours

20,000

200,000

Production runs

40

60

Inspection hours

800

1,200

Maintenance hours

10,000

90,000

Overhead costs:

 

 

     Setup costs

$270,000

 

     Inspection costs

$210,000

 

     Machining

$240,000

 

     Maintenance

$270,000

 

     Total

$990,000

 

  1. Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?
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Expert Answer

Step 1

Following are the calculation of overhead cost per unit for each product by using a plant wide rate based on direct labor:

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Overhead cost rate using plantwide 990,000 rate based on direct labor hours 440,000 $2.25 Model A Overhead cost per unit 140,000 10,000 $2.25 x for Product Model A =$31.50 Model B Overhead cost per unit 300,000 - $2.25 x for Product Model B 100, 000 =$6.75

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Step 2

Following are the calculation of overhead cost per unit ...

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Activity Activity Based Overhead rate $2,700 $105 $1.09 $2.7 Estimated Cost Driver Expected use of Cost Driver Overhead Production run Inspection Hour Machine Hour Maintenance Hour $270,000 $210,000 $240,000 $270.000 Setup costs Inspection costs Machining Maintenance 100 2000 220,000 100,000 Total Factory Overhead Cost of Product Model A & cost per unit Activity Activity Based Expected Use Estimated Overhead of Cost Driver Overhead Rate $2,700 $105 $1.09 $2.7 Setup costs Inspection costs Machining Maintenance Total Overhead Cost Unit Produced Overhead Cost per unit for product Model A 40 S00 20,000 10,000 $108.000 $84,000 $21,818 $27,000 $240,818 10,000 $24.08 Total Factory Overhead Cost of Product Model B & cost per unit Activity Based Expected Use Overhead Rate $2,700 $105 $1.09 $2.7 Estimated Overhead $162,000 $126.000 $218,182 $243.000 $749,182 100,000 Activity of Cost Driver 60 Setup costs Inspection costs Machining Maintenance Total Overhead Cost Unit Produced Overhead Cost per unit for product Model B 1200 200,000 90,000 $7.49

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