Concept explainers
Ryan Foods produces gourmet gift baskets that it distributes online as well as from its small retail store. The following details about
Production Activity | Indirect Labor | Indirect Materials | Other Overhead |
Wrapping………………… | $300,000 | $200,000 | |
Assembling…………....... | 400,000 | ||
Product design…………. | 180,000 | ||
Obtaining business licenses……….. | $100,000 | ||
Cooking………………….. | 150,000 | 120,000 |
Additional information on the drivers for its production activities follows.
Wrapping…………………………………. | 100,000 units |
Assembling………………………………. | 20,000 direct labor hours |
Product design…………………………. | 3,000 design hours |
Obtaining business licenses………. | 20,000 direct labor hours |
Cooking…………………………………….. | 1,000 batches |
Required
- Classify each activity as unit level, batch level, product level, or facility level.
- Compute the activity overhead rates using ABC. From cost pools as appropriate.
- Determine the overhead cost to assign to the following jobs using ABC.
Holiday Basket | Executive Basket | |
Number of units | 8,000 units | 1,000 units |
Direct labor hours | 2,000 DLH | 500 DLH |
Design hours | 40 design hours | 40 design hours |
Batches | 80 batches | 200 batches |
- What is the overhead cost per unit for the Holiday Basket? What is the overhead coat per unit for the Executive Basket?
- If the company used a plantwide overhead ate based on direct labor hours, what is the overhead cost for each Holiday Basket unit? What would be the overhead cost for each Executive Basket unit if a single plantwide rate is used?
- Compare the cost per unit computed in requirements 4 and 5 for each job. Which cost assignment method provides the most accurate? Explain.
(1)
Concept introduction:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
To classify:
The activities as unit level, batch level, product level, or facility level.
Explanation of Solution
Activity | Activity Cost Driver | |
Wrapping | Unit level | As the cost of wrapping is assigned on the number of units. |
Assembling | Direct labour hour | As the assembling cost is based on the available labour hours. |
Product Design | Product Level − Design hours | As the product design cost is based in the hours available for the design of the product. |
Obtaining Licence | Direct labour hour | As the obtaining business licence cost is based on the available labour hours. |
Cooking | Batch level | As the cost of cooking is based on the number of batches. |
(2)
Concept introduction:
Activity based costing:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
To calculate:
The activity overhead rates using ABC method.
Explanation of Solution
Showing overhead rate:
Activity | Amount (a) | Quantity (b) | Overhead rate |
Wrapping | |||
Assembling | |||
Product design | |||
License for business | |||
Cooking |
(3)
Concept introduction:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
Using activity-based costing assign overhead cost to the jobs.
Answer to Problem 3PSB
Activity | Holiday basket |
Executive basket |
Total overhead cost |
Explanation of Solution
Computation of total overhead cost:
Activity | Cost |
Holiday Basket | Activity total drivers | Activity Proportion | Holiday basket Cost |
Wrapping | |||||
Assembling | |||||
Product design | |||||
License for business | |||||
Cooking | |||||
Total |
Activity | Cost |
Executive Basket | Activity total drivers | Activity Proportion | Holiday basket Cost |
Wrapping | |||||
Assembling | |||||
Product design | |||||
License for business | |||||
Cooking | |||||
Total |
(4)
Concept introduction:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
Overhead cost per unit of executive basket and holiday basket.
Answer to Problem 3PSB
Activity | Holiday basket | Executive basket |
overhead cost per unit |
Explanation of Solution
Activity | Holiday basket | Executive basket |
Total overhead cost | ||
Volume | ||
Cost per unit overhead |
For,
(5)
Concept introduction:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
Overhead cost for holiday basket and executive basket if the corporate using plantwide overhead rate on direct labour hours.
Answer to Problem 3PSB
Activity | Holiday basket | Executive basket |
Overhead cost per unit |
Explanation of Solution
Computation of plant wide overhead cost
Therefore overhead cost per unit of holiday and executive basket is as follows:
Activity | Holiday basket | Executive basket |
Total direct labour hours(DL) | ||
Volume | ||
Overhead cost per unit |
(6)
Concept introduction:
Activity based costing: It can be defined as the costing that assigns cost using factors like cost pools related to an overhead and then assign the costs to the products.
To compare:
Cost per unit calculated in requirement 4 and 5 and determine cost assignment with better accuracy.
Explanation of Solution
Activity based costing can be defined as the costing that assigns cost by assigning costs using factors like cost pools related to a particular overhead and then assign the costs to the products. Holiday basket has shown not much discrepancy in both the methods, but executive basket as per ABC is
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Chapter 4 Solutions
Loose-Leaf for Managerial Accounting with Connect
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