Concept explainers
Single plantwide rate and activity-based costing
Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:
Prior to conducting the study, the factory
Machining Activity | Setup Activity | Sales order Processing Activity | |
Activity rate | $160 | $240 | $55 |
A. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). (Round per-unit overhead to two decimal places and percents to one decimal place.)
Product Volume Class | Column A Single Rate Overhead Allocation per Unit | Column B ABC Overhead Allocation per Unit | Column C Percent Change in Allocation (Col. B - Col. A)/Col. A |
Low | |||
Medium | |||
High |
B. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method?
C. Interpret Column C in your table from part (A).
A.
Single plant-wide factory overhead rate: The rate at which the factory or manufacturing overheads are allocated to products is referred to as single plant-wide factory overhead rate.
Formula to compute single plant-wide overhead rate:
Activity-based costing (ABC) method: The costing method which allocates overheads to the products based on factory overhead rate for each activity or cost object, according to the cost pooled for the cost drivers (allocation base).
Formula to compute activity-based overhead rate:
To compute: The single plant-wide overhead, ABC overhead for all the three products, and the percentage change in the allocation, and complete the Columns A, B, and C in the given table
Explanation of Solution
Complete the blanks for Column A, B, and C.
Product Volume Class | Column A (Single Rate Overhead Allocation Per Unit) |
Column B (ABC Overhead Allocation Per Unit) | Column C (Percent Change in Allocation) |
Low | $30.00 | $58.06 | |
Medium | 30.00 | 29.31 | |
High | 30.00 | 25.46 |
Table (1)
Working Notes:
Compute factory overhead allocated per unit of each product, using single machine rate of $200 per machine hour (MH) (Column A).
Product Volume Class | Single Plant-Wide Overhead Rate | × | Total Number of MH | = | Total Factory Overhead | ÷ | Number of Units | = | Factory Overhead Per Unit |
Low | $200 | × | 24 MH | = | $4,800 | ÷ | 160 | = | $30.00 |
Medium | $200 | × | 225 MH | = | 45,000 | ÷ | 1,500 | = | $30.00 |
High | $200 | × | 900 MH | = | 180,000 | ÷ | 6,000 | = | $30 .00 |
Table (2)
Compute ABC factory overhead allocated per unit of each product (Column B).
Step 1: Compute activity cost allocated per unit of low volume refrigerators.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost |
Machining | $160 per MH | × | 24 MH | = | $3,840 |
Setup | $240 per setup | × | 14 setups | = | 3,360 |
Sales order processing | $55 per sales order | × | 38 orders | = | 2,090 |
Total activity costs allocated to low volume refrigerators | $9,290 | ||||
Number of units of low volume refrigerators | ÷160 units | ||||
Activity-based overhead cost per unit of low volume refrigerator | $58.06 |
Table (3)
Step 2: Compute activity cost allocated per unit of medium volume refrigerators.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost Allocated |
Machining | $160 per MH | × | 225 MH | = | $36,000 |
Setup | $240 per setup | × | 13 setups | = | 3,120 |
Sales order processing | $55 per sales order | × | 88 orders | = | 4,840 |
Total activity costs allocated to medium volume refrigerators | $43,960 | ||||
Number of units of medium volume refrigerators | ÷1,500 units | ||||
Activity-based overhead cost per unit of refrigerator | $29.31 |
Table (4)
Step 3: Compute activity cost allocated per unit of high volume refrigerators.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost Allocated |
Machining | $160 per MH | × | 900 MH | = | $144,000 |
Setup | $240 per setup | × | 9 setups | = | 2,160 |
Sales order processing | $55 per sales order | × | 120 orders | = | 6,600 |
Total activity costs allocated to high volume refrigerators | $152,760 | ||||
Number of units of high volume refrigerators | ÷6,000 units | ||||
Activity-based overhead cost per unit of refrigerator | $25.46 |
Table (5)
Compute the percent change in the allocation (Column C).
Product Volume Class | Column B (ABC Overhead Allocation Per Unit) | ˗ | Column A (Single Rate Overhead Allocation Per Unit) |
÷ | Column A (Single Rate Overhead Allocation Per Unit) |
= | Percent Change in Allocation |
Low | $58.06 | ˗ | $30.00 | ÷ | $30.00 | = | 93.53% |
Medium | 29.31 | ˗ | 30.00 | ÷ | 30.00 | = | (2.3)% |
High | 25.46 | ˗ | 30.00 | ÷ | 30.00 | = | (15.1)% |
Table (6)
Note: refer to Tables (2), (3), (4), and (5) for value and computation of Column A and Column B values.
B.
To discuss: The reasons for the difference in machine rate under single plant-wide approach and ABC approach
Explanation of Solution
The machine hour rate under ABC, $160 per machine hour, as computed in Part (1), is different from the $200 single machine rate under single plant-wide approach. This is because the ABC method allocates all the overheads based on the activities under production. So, setup and sales order processing activities are allocated their share in factory overheads.
C.
To discuss: The percent change in allocation (Column C)
Explanation of Solution
As per the ABC method, low volume refrigerator has high activity cost per unit comparatively. This is because this product consumes high overheads for the setup activity with highest cost. The company could reduce the cost of setup activity.
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Chapter 18 Solutions
FINANCIAL & MANAGERIAL ACCT LOOSE LEAF
- Activity-based product costing Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows: The activity bases identified for each activity are as follows: The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows: Each product requires 40 minutes per unit of machine time. Instructions Determine the activity rate for each activity. Determine the total and per-unit activity cost for all three products. Round to nearest cent. Why arent the activity unit costs equal across all three products since they require the same machine time per unit?arrow_forwardProduction-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers Willow Company produces lawnmowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant: Additionally, the following overhead activity costs are reported: Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of 40,000 each. The operators spend 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs 3 per move. Depreciation amounts to 8,000 per forklift per year. Required: (Note: Round answers to two decimal places.) 1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers. 2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs. 3. Calculate activity rates, and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2. 4. Calculate consumption ratios for each activity. 5. CONCEPTUAL CONNECTION Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.arrow_forwardYoung Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. All production costs approach those costs that were budgeted. b. The sales mix does not vary from the mix that was budgeted. c. All manufacturing overhead is a fixed cost. d. All ending inventory balances are zero.arrow_forward
- Patterson Company produces wafers for integrated circuits. Data for the most recent year are provided: aCalculated using number of dies as the single unit-level driver. bCalculated by multiplying the consumption ratio of each product by the cost of each activity. Required: 1. Using the five most expensive activities, calculate the overhead cost assigned to each product. Assume that the costs of the other activities are assigned in proportion to the cost of the five activities. 2. Calculate the error relative to the fully specified ABC product cost and comment on the outcome. 3. What if activities 1, 2, 5, and 8 each had a cost of 650,000 and the remaining activities had a cost of 50,000? Calculate the cost assigned to Wafer A by a fully specified ABC system and then by an approximately relevant ABC approach. Comment on the implications for the approximately relevant approach.arrow_forwardLampierre makes brass and gold frames. The company computed this information to decide whether to switch from the traditional allocation method to ABC: The estimated overhead for the material cost pool is estimated as $12,500, and the estimate for the machine setup pool is $35,000. Calculate the allocation rate per unit of brass and per unit of gold using: A. The traditional allocation method B. The activity-based costing methodarrow_forwardActivity cost pools, activity rates, and product costs using activity-based costing Caldwell Home Appliances Inc. is estimating the activity cost associated with producing ovens and refrigerators. The indirect labor can be traced into four separate activity pools, based on time records provided by the employees. The budgeted activity cost and activity-base information are provided as follows: The estimated activity-base usage and unit information for two product lines was determined as follows: A. Determine the activity rate for each activity cost pool. B. Determine the activity-based cost per unit of each product.arrow_forward
- Use the following information for Brief Exercises 4-34 and 4-35: Sanjay Company manufactures a product in a factory that has two producing departments, Assembly and Painting, and two support departments, S1 and S2. The activity driver for S1 is square footage, and the activity driver for S2 is number of machine hours. The following data pertain to Sanjay: Brief Exercises 4-34 (Appendix 4B) Assigning Support Department Costs by Using the Direct Method Refer to the information for Sanjay Company above. Required: 1. Calculate the cost assignment ratios to be used under the direct method for Departments S1 and S2. (Note: Each support department will have two ratiosone for Assembly and the other for Painting.) 2. Allocate the support department costs to the producing departments by using the direct method.arrow_forwardEclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse: Direct machine hours were estimated as follows: In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base. b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department. c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Support your recommendation.arrow_forwardStacks manufactures two different levels of hockey sticks: the Standard and the Slap Shot. The total overhead of $600,000 has traditionally been allocated by direct labor hours, with 400,000 hours for the Standard and 200.000 hours for the Slap Shot. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $450.000 of overhead, with 30,000 hours used on the Standard product and 15,000 hours used on the Slap Shot product. It was also estimated that the inspection cost pool would have $150,000 of overhead, with 25,000 hours for the Standard and 5,000 hours for the Slap Shot. What is the overhead rate per product, under traditional and under ABC costing?arrow_forward
- Evans, Inc., has a unit-based costing system. Evanss Miami plant produces 10 different electronic products. The demand for each product is about the same. Although they differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. To help design engineers understand the assumed cost relationships, the Cost Accounting Department developed the following cost equation. (The equation describes the relationship between total manufacturing costs and direct labor hours; the equation is supported by a coefficient of determination of 60 percent.) Y=5,000,000+30X,whereX=directlaborhours The variable rate of 30 is broken down as follows: Because of competitive pressures, product engineering was given the charge to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on. After one year of design changes, the normal volume of direct labor was reduced from 250,000 hours to 200,000 hours, with the same number of products being produced. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, the labor content per unit of product dropped from 1.25 hours per unit to one hour per unit. Fixed overhead, however, increased from 5,000,000 to 6,600,000 per year. Suppose that a consultant was hired to explain the increase in fixed overhead costs. The consultants study revealed that the 30 per hour rate captured the unit-level variable costs; however, the cost behavior of other activities was quite different. For example, setting up equipment is a step-fixed cost, where each step is 2,000 setup hours, costing 90,000. The study also revealed that the cost of receiving goods is a function of the number of different components. This activity has a variable cost of 2,000 per component type and a fixed cost that follows a step-cost pattern. The step is defined by 20 components with a cost of 50,000 per step. Assume also that the consultant indicated that the design adopted by the engineers increased the demand for setups from 20,000 setup hours to 40,000 setup hours and the number of different components from 100 to 250. The demand for other non-unit-level activities remained unchanged. The consultant also recommended that management take a look at a rejected design for its products. This rejected design increased direct labor content from 250,000 hours to 260,000 hours, decreased the demand for setups from 20,000 hours to 10,000 hours, and decreased the demand for purchasing from 100 component types to 75 component types, while the demand for all other activities remained unchanged. Required: 1. Using normal volume, compute the manufacturing cost per labor hour before the year of design changes. What is the cost per unit of an average product? 2. Using normal volume after the one year of design changes, compute the manufacturing cost per hour. What is the cost per unit of an average product? 3. Before considering the consultants study, what do you think is the most likely explanation for the failure of the design changes to reduce manufacturing costs? Now use the information from the consultants study to explain the increase in the average cost per unit of product. What changes would you suggest to improve Evanss efforts to reduce costs? 4. Explain why the consultant recommended a second look at a rejected design. Provide computational support. What does this tell you about the strategic importance of cost management?arrow_forwardActivity-based costing and product cost distortion The management of Four Finger Appliance Company in Exercise 14 has asked you to use activity-based costing instead of direct labor hours to allocate factory overhead costs to the two products. You have determined that 81,000 of factory overhead from each of the production departments can be associated with setup activity (162,000 in total). Company records indicate that blenders required 135 setups, while the toaster ovens required only 45 setups. Each product has a production volume of 7,500 units. Determine the three activity rates (assembly, test and pack, and setup). Determine the total factory overhead and factory overhead per unit allocated to each product using the activity rates in (A).arrow_forwardThe controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with materials handling costs. The high and low levels of resource usage occurred in September and March for three different resources associated with materials handling. The number of moves is the driver. The total costs of the three resources and the activity output, as measured by moves for the two different levels, are presented as follows: Required: 1. Determine the cost behavior formula of each resource. Use the high-low method to assess the fixed and variable components. 2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 9,000 moves. 3. Construct a cost formula that can be used to predict the total cost of the three resources combined. Using this formula, predict the total materials handling cost if activity output is 9,000 moves. In general, when can cost formulas be combined to form a single cost formula?arrow_forward
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