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 cut to. costs, which are as follows:   Setup equipment $ 45,000 Depreciation    50,000 Operating costs    55,000   *Computed on a straight-line basis book value at the beginning of the year was S250.000   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: Do you think that the direct labor costs and direct materials costs are accurately tracel each type of purse? Explain. The controller has suggested that overhead costs be assigned to each product using a plant. wide rate based on direct labor dollars. Machine costs and setup costs are overhead cost 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. Do you think that these costs are traced accurately to each purse? Explain. Now calculate the overhead cost per unit per purse using two overhead rates: one for the setup activity and one for the machining activity. In choosing a driver to assign the setup costs, did you use number of setups or setup hours? Why? As part of your explanation define transaction and duration drivers. Do you think machine costs are traced accurately to each type of purse? Explain.

Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter4: Activity-based Costing
Section: Chapter Questions
Problem 4CE: Larsen, Inc., produces two types of electronic parts and has provided the following data: There are...
icon
Related questions
Question

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 cut to. costs, which are as follows:

 

Setup equipment

$ 45,000

Depreciation

   50,000

Operating costs

   55,000

 

*Computed on a straight-line basis book value at the beginning of the year was S250.000

 

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 tracel each type of purse? Explain.
  2. The controller has suggested that overhead costs be assigned to each product using a plant. wide rate based on direct labor dollars. Machine costs and setup costs are overhead cost 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. Do you think that these costs are traced accurately to each purse? Explain.
  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. In choosing a driver to assign the setup costs, did you use number of setups or setup hours? Why? As part of your explanation define transaction and duration drivers. Do you think machine costs are traced accurately to each type of purse? Explain.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 6 images

Blurred answer
Knowledge Booster
Decision to Sell before or after additional processing
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College