Concept explainers
A.
Single plant-wide factory overhead rate: The rate at which the factory or manufacturing
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 rate using direct machine hours (DLH) as the allocation base, and compute factory overhead or indirect labor cost allocated per unit
A.
Explanation of Solution
Compute single plant-wide overhead rate using DLH as the allocation base.
Compute the factory overhead allocated per unit for each product.
Step 1: Compute DLH per unit for cell phones.
Step 2: Compute DLH per unit for tablets.
Step 3: Compute indirect labor cost or factory overhead allocated per unit of each product.
Types of Products | Single Plant-Wide Overhead Rate | × | Number of DLH Per Unit of Each Product | = | Factory Overhead Per Unit |
Cell phones | $100 per DLH | × | 0.2 DLH | = | $2 per unit |
Tablets | $100 per DLH | × | 0.2 DLH | = | $2 per unit |
Table (1)
Note: Refer to Equation (1) for value and computation of single plant-wide overhead rate. Refer to Equations (2) and (3) for value and computation of DLH per unit of each product.
B.
To compute: The activity-based overhead rate for each of the given activities
B.
Explanation of Solution
Compute activity-based overhead rates for each activity.
Step 1: Compute activity cost for setup activity.
Step 2: Compute activity cost for production support activity.
Step 3: Compute activity-based overhead rates for each activity.
Computation of Activity-Based Overhead Rates | |||||
Activity | Activity Cost | ÷ | Total Activity-Base Usage | = | Activity-Based Overhead Rates |
Setup | $150,000 | ÷ | 2,000 setups | = | $75 per setup |
Production support | 225,000 | ÷ | 3,750 DLH | = | $60 per DLH |
Table (2)
Note: Refer to Equations (4) and (5) for value and computation of activity cost.
C.
To compute: The activity-cost per unit of the products
C.
Explanation of Solution
Compute activity cost allocated per unit of cell phone.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base (Cost Driver) | = | Activity Cost Allocated |
Setup | $75 per setup | × | 600 setups | = | $45,000 |
Production support | $60 per DLH | × | 1,875 DLH | = | 112,500 |
Total activity costs allocated to cell phones | $157,500 | ||||
Number of units of cell phone | ÷ 93,750 units | ||||
Activity-based overhead cost per unit of cell phone | $1,68 |
Table (3)
Note: Refer to Table (2) for the value and computation of activity allocation rates.
Compute activity cost allocated per unit of tablet.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base (Cost Driver) | = | Activity Cost Allocated |
Setup | $75 per setup | × | 1,400 setups | = | $105,000 |
Production support | $60 per DLH | × | 1,875 DLH | = | 112,500 |
Total activity costs allocated to tablets | $217,500 | ||||
Number of units of tablet | ÷ 93,750 units | ||||
Activity-based overhead cost per unit of tablet | $2.32 |
Table (3)
Note: Refer to Table (2) for the value and computation of activity allocation rates.
D.
To discuss: The product cost distortion due to single plant-wide overhead rate
D.
Explanation of Solution
The product cost under single plant-wide overhead rate approach and ABC approach are different. The product cost is distorted in single plant-wide overhead rate approach because the time spent for setup production for cell phones and tablets is not in the same ratio as the direct labor hours used in support production for cell phones and tablets.
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Chapter 4 Solutions
Managerial Accounting
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