Chapter 4, Problem 3PSB

Ryan Foods produces gourmet gift baskets that it distributes online as well as from its small retail store. The following details about overhead costs are taken from its records.

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

1. Classify each activity as unit level, batch level, product level, or facility level.
2. Compute the activity overhead rates using ABC. From cost pools as appropriate.
3. 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

1. What is the overhead cost per unit for the Holiday Basket? What is the overhead coat per unit for the Executive Basket?
2. 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?
3. Compare the cost per unit computed in requirements 4 and 5 for each job. Which cost assignment method provides the most accurate? Explain.

To determine

(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.

To determine

(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	$500,000$	$100,000$	$\$5$
Assembling	$400,000$	$20,000$	$\$20$
Product design	$180,000$	$3,000$	$\$60$
License for business	$100,000$	$20,000$	$\$5$
Cooking	$270,000$	$1,000$	$\$270$

$\text{Overhead Rate}=\frac{\text{Amount}}{\text{Quantity}}$

To determine

(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	$114,000$	$73,900$

Explanation of Solution

Computation of total overhead cost:

Activity	Cost $\$$	Holiday Basket	Activity total drivers	Activity Proportion	Holiday basket Cost $\$$
Wrapping	$500,000$	$8,000$	$100,000$	$0.08$	$40,000$
Assembling	$400,000$	$2,000$	$20,000$	$0.10$	$40,000$
Product design	$180,000$	$40$	$3,000$	$0.01334$	$2,400$
License for business	$100,000$	$2,000$	$20,000$	$0.10$	$10,000$
Cooking	$270,000$	$80$	$1,000$	$0.08$	$21,600$
Total					$114,000$

Activity	Cost $\$$	Executive Basket	Activity total drivers	Activity Proportion	Holiday basket Cost $\$$
Wrapping	$500,000$	$1,000$	$100,000$	$0.01$	$5,000$
Assembling	$400,000$	$500$	$20,000$	$0.025$	$10,000$
Product design	$180,000$	$40$	$3,000$	$0.01334$	$2,400$
License for business	$100,000$	$500$	$20,000$	$0.025$	$2,500$
Cooking	$270,000$	$200$	$1,000$	$0.20$	$54,000$
Total					$73,900$

To determine

(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	$\$14.25$	$\$73.9$

Explanation of Solution

Activity	Holiday basket	Executive basket
Total overhead cost	$\$114,000$	$\$73,900$
Volume	$8,000$	$1,000$
Cost per unit overhead	$\$14.25$	$\$73.9$

$\text{Cost per unit overhead}=\frac{\text{Total Overhead Cost}}{\text{Volume}}$

For,

$\begin{array}{c}\text{Holiday Basket}=\frac{\$114,000}{8,000}\\ =\$14.25\end{array}$

$\begin{array}{c}\text{Executive Basket}=\frac{\$73,900}{1,000}\\ =\$73.9\end{array}$

To determine

(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	$\$18.13$	$\$36.25$

Explanation of Solution

Computation of plant wide overhead cost

$\text{Total overhead}=\$1,450,000$

$\text{Total direct labour hours}\left(\text{DL}\right)=20,000$

$\text{Plant wide overhead rate}=72.5$

Therefore overhead cost per unit of holiday and executive basket is as follows:

Activity	Holiday basket	Executive basket
Total direct labour hours(DL)	$2,000$	$500$
$\text{Total direct labour hour}\times \text{72}\text{.5}$	$145,000$	$36,250$
Volume	$8,000$	$1,000$
Overhead cost per unit	$\$18.13$	$\$36.25$

To determine

(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 $\$73.9$ and as per plant wide it is $\$36.25$.