Required: 1. Do you think that the direct labor costs and direct materials costs are accurately traced to each type of purse? Yes 2. The controller has suggested that overhead costs be assigned to each product using a plantwide rate based on direct labor dollars. Machine costs and setup costs are overhead costs. Assume that these are the only overhead costs. For each type of purse, calculate the overhead per unit that would be assigned using a direct labor dollars overhead rate. Unit Overhead Cost Standard $ per purse Handcrafted $ per purse Do you think that these costs are traced accurately to each purse? Yes 3. Now calculate the overhead cost per unit per purse using two overhead rates: one for the setup activity and one for the machining activity. Round your answers to the nearest cent. Unit Overhead Cost Standard $per purse Handcrafted $per purse In choosing a driver to assign the setup costs, did you use number of setups or setup hours? setup hours Do you think machine costs are traced accurately to each type of purse? Yes
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.
Drivers and Product-Costing Accuracy
McCourt Company produces two types of leather purses: standard and handcrafted. Both purses use equipment for cutting and stitching. The equipment also has the capability of creating standard designs. The standard purses use only these standard designs. They are all of the same size to accommodate the design features of the equipment. The handcrafted purses can be cut to any size because the designs are created manually. Many of the manually produced designs are in response to specific requests of retailers. The equipment must be specially configured to accommodate the production of a batch of purses that will receive a handcrafted design. McCourt Company assigns overhead using direct labor dollars. Muggs Clark, sales manager, is convinced that the purses are not being costed correctly.
To illustrate his point, he decided to focus on the expected annual setup and machine-related costs, which are as follows:
| Setup equipment | $45,000 | |
| 50,000 | * | |
| Operating costs | 55,000 |
* Computed on a straight-line basis; book value at the beginning of the year was $250,000.
The machine has the capability of supplying 250,000 machine hours over its remaining life.
Muggs also collected the expected annual prime costs for each purse, the machine hours, and the expected production (which is the normal output for the company).
| Standard Purse | Handcrafted Purse | ||||
| Direct labor | $30,000 | $90,000 | |||
| Direct materials | $30,000 | $30,000 | |||
| Units | 7,500 | 7,500 | |||
| Machine hours | 45,000 | 5,000 | |||
| Number of setups | 100 | 100 | |||
| Setup time | 1,000 | hrs. | 500 | hrs. |
Required:
1. Do you think that the direct labor costs and direct materials costs are accurately traced to each type of purse?
Yes
2. The controller has suggested that overhead costs be assigned to each product using a plantwide rate based on direct labor dollars. Machine costs and setup costs are overhead costs. Assume that these are the only overhead costs. For each type of purse, calculate the overhead per unit that would be assigned using a direct labor dollars overhead rate.
| Unit Overhead Cost | |
| Standard | $ per purse |
| Handcrafted | $ per purse |
Do you think that these costs are traced accurately to each purse?
Yes
3. Now calculate the overhead cost per unit per purse using two overhead rates: one for the setup activity and one for the machining activity.
Round your answers to the nearest cent.
| Unit Overhead Cost | |
| Standard | $per purse |
| Handcrafted | $per purse |
In choosing a driver to assign the setup costs, did you use number of setups or setup hours?
setup hours
Do you think machine costs are traced accurately to each type of purse?
Yes
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