Concept explainers
Activity-based and department rate product costing and product cost distortions
Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory
The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:
Instructions
Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively.
Determine the total and per-unit
Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.
Determine the total and per-unit cost assigned to each product under activity-based costing.
Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.
1.
Compute the multiple production department overhead rates for both departments.
Explanation of Solution
Multiple production department factory overhead rates: This allocation method identifies different departments in the process of production. The factory overheads are allocated to products based on the overhead rate for each of the production departments.
Formula to compute multiple production department overhead rates:
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:
Compute multiple production department overhead rate for cutting department.
Compute multiple production department overhead rate for finishing department.
2.
Compute the factory overhead allocated to total and per unit of each product.
Explanation of Solution
Compute total factory overhead and per unit overhead allocated for snowboards.
Production Department | Multiple Production Department Overhead Rate | × | Total Number of Budgeted DLH | = | Factory Overhead |
Cutting | $52.50 per DLH | × | 4,000 DLH | = | $210,000 |
Finishing | $90 per DLH | × | 2,000 DLH | = | 180,000 |
Total factory overhead costs allocated for snowboards | $390,000 | ||||
Number of units of snowboards | ÷ 6,000 units | ||||
Factory overhead cost per unit of snowboard | $65.00 |
Table (1)
Note: Refer to part (A) for value and computation of multiple production department overhead rate.
Compute total factory overhead and per unit overhead allocated for skis.
Production Department | Multiple Production Department Overhead Rate | × | Total Number of Budgeted DLH | = | Factory Overhead |
Cutting | $52.50 per DLH | × | 2,000 DLH | = | $105,000 |
Finishing | $90 per DLH | × | 4,000 DLH | = | 360,000 |
Total factory overhead costs allocated for skis | $465,000 | ||||
Number of units of skis | ÷ 6,000 units | ||||
Factory overhead cost per unit of ski | $77.50 |
Table (2)
Note: Refer to part (A) for value and computation of multiple production department overhead rate.
3.
Calculate the activity-based overhead rate for each of the given activities
Explanation of Solution
Compute activity-based overhead rates.
Computation of Activity-Based Overhead Rates | |||||
Activity | Activity Cost | ÷ | Total Activity-Base Usage | = | Activity-Based Overhead Rates |
Production control | $237,000 | ÷ | 500 production runs | = | $474 per run |
Materials handling | 270,000 | ÷ | 7,500 moves | = | $36 per move |
Cutting | 156,000 | ÷ | 6,000 DLH | = | $26 per DLH |
Finishing | 192,000 | ÷ | 6,000 DLH | = | $32 per DLH |
Table (3)
4.
Calculate the activity-cost per unit of the products
Explanation of Solution
Compute activity cost allocated per unit of snowboards.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base (Cost Driver) | = | Activity Cost Allocated |
Production control | $474 per run | × | 430 runs | = | $203,820 |
Materials handling | 36 per move | × | 5,000 moves | = | 180,000 |
Cutting | 26 per DLH | × | 4,000 DLH | = | 104,000 |
Finishing | 32 per DLH | × | 2,000 DLH | = | 64,000 |
Total activity costs allocated to snowboards | $551,820 | ||||
Number of units of snowboard | ÷ 6,000 units | ||||
Activity-based overhead cost per unit of snowboards | $91.97 |
Table (4)
Note: Refer to Table (3) for the value and computation of activity allocation rates.
Compute activity cost allocated per unit of snowboards.
Activity | Activity-Based Overhead Rates | × | Actual Use of Activity-Base (Cost Driver) | = | Activity Cost Allocated |
Production control | $474 per run | × | 70 runs | = | $33,180 |
Materials handling | 36 per move | × | 2,500 moves | = | 90,000 |
Cutting | 26 per DLH | × | 2,000 DLH | = | 52,000 |
Finishing | 32 per DLH | × | 4,000 DLH | = | 128,000 |
Total activity costs allocated to skis | $303,180 | ||||
Number of units of skis | ÷ 6,000 units | ||||
Activity-based overhead cost per unit of ski | $50.53 |
Table (5)
Note: Refer to Table (3) for the value and computation of activity allocation rates.
5.
Discuss the product cost distortion due to multiple production department overhead rate
Explanation of Solution
The product cost under multiple production department overhead rate approach and ABC approach are different. The product cost is distorted in multiple production department overhead rate approach. Although the time spent for cutting and finishing for snowboards and skis is in the same ratio, but the production control department and materials handling department are not accounted for in multiple department overhead rate method.
Want to see more full solutions like this?
Chapter 4 Solutions
MANAGERIAL ACCOUNTING-ACCESS
- Activity-based department rate product costing and product cost distortions Big Sound Inc. manufactures two products: receivers and loudspeakers. The factory overhead incurred is as follows: The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows: The activity-base usage quantities and units produced for the two products follow: Instructions Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is 420,000 and 294,000 for the Subassembly and Final Assembly departments, respectively. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Determine the total and per-unit cost assigned to each product under activity-based costing. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods. production department factory overhead rate and activity-based costing methods.arrow_forwardMultiple production department factory overhead rates The management of Spotted Cow Dairy Company, described in Problem 1B, now plans to use the multiple production department factory overhead rate method. The total factory overhead associated with each department is as follows: Instructions Determine the multiple production department factory overhead rates, using machine hours for the Blending Department and direct labor hours for the Packing Department. Determine the product factory overhead costs, using the multiple production department rates in (1).arrow_forwardThe management of Gwinnett County Chrome Company, described in Problem 1A, now plans to use the multiple production department factory overhead rate method. The total factory overhead associated with each department is as follows: Instructions 1. Determine the multiple production department factory overhead rates, using direct labor hours for the Stamping Department and machine hours for the Plating Department. 2. Determine the product factory overhead costs, using the multiple production department rates in (1).arrow_forward
- Activity-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_forwardActivity-based product costing Sweet Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) 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 0.5 machine hour per unit. 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_forwardUse the following information for Brief Exercises 4-27 and 4-28: Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance hours. The following data pertain to Quillen: Brief Exercises 4-27 (Appendix 4B) Assigning Support Department Costs by Using the Direct Method Refer to the information for Quillen 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 Cutting and the other for Sewing.) 2. Allocate the support department costs to the producing departments by using the direct method.arrow_forward
- 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_forwardPrimera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided: Actual results reported by department and product during the year are as follows: Required: 1. Compute the plantwide predetermined overhead rate and calculate the overhead assigned to each product. 2. Calculate the predetermined departmental overhead rates and calculate the overhead assigned to each product. 3. Using departmental rates, compute the applied overhead for the year. What is the under- or overapplied overhead for the firm? 4. Prepare the journal entry that disposes of the overhead variance calculated in Requirement 3, assuming it is not material in amount. What additional information would you need if the variance is material to make the appropriate journal entry?arrow_forwardLansing. Inc., provided the following data for its two producing departments: Machine hours are used to assign the overhead of the Molding Department, and direct labor hours are used to assign the overhead of the Polishing Department. There are 30,000 units of Form A produced and sold and 50,000 of Form B. Required: 1. Calculate the overhead rates for each department. 2. Using departmental rates, assign overhead to live two products and calculate the overhead cost per unit. How does this compare with the plantwide rate unit cost, using direct labor hours? 3. What if the machine hours in Molding were 1,200 for Form A and 3,800 for Form B and the direct labor hours used in Polishing were 5,000 and 15,000, respectively? Calculate the overhead cost per unit for each product using departmental rates, and compare with the plantwide rate unit costs calculated in Requirement 2. What can you conclude from this outcome?arrow_forward
- Crystal Scarves Co. produces winter scarves. The scarves are produced in the Cutting and Sewing departments. The Maintenance and Security departments support these production departments, and allocate costs based on machine hours and square feet, respectively. Information about each department is provided in the following table: Using the sequential method and allocating the support department with the highest costs first, allocate all support department costs to the production departments. Then compute the total cost of each production department.arrow_forwardOverhead Rates, Unit Costs Folsom Company manufactures specialty tools to customer order. There are three producing departments. Departmental information on budgeted overhead and various activity measures for the coming year is as follows: Currently, overhead is applied on the basis of machine hours using a plantwide rate. However, Janine, the controller, has been wondering whether it might be worthwhile to use departmental overhead rates. She has analyzed the overhead costs and drivers for the various departments and decided that Welding and Finishing should base their overhead rates on machine hours and that Assembly should base its overhead rate on direct labor hours. Janine has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 35% markup over full manufacturing cost. Round all overhead rates to the nearest cent. Round all bid prices to the nearest dollar. Required: 1. Calculate a plantwide rate for Folsom Company based on machine hours. What is the bid price of each job using this rate? 2. Calculate departmental overhead rates for the producing departments. What is the bid price of each job using these rates?arrow_forwardDetermining job costcalculation of predetermined rate for applying overhead by direct labor cost and direct labor hour methods Beemer Products Inc. has its factory divided into three departments, with individual factory overhead rates for each department. In each department, all the operations are sufficiently alike for the department to be regarded as a cost center. The estimated monthly factory overhead for the departments is as follows: Forming, 64,000; Shaping, 36,000; and Finishing, 10,080. The estimated production data include the following: The job cost ledger shows the following data for X6, which was completed during the month: Required: Determine the cost of X6. Assume that the factory overhead is applied to production orders, based on the following: 1. Direct labor cost 2. Direct labor hours (Hint: You must first determine overhead rates for each department, rounding rates to the nearest cent.)arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College