Chapter 5, Problem 14PSB

a

To determine

Calculate the predetermined overhead rate used by the company.

Explanation of Solution

Calculation of total labor hours:

$\begin{array}{c}\text{Total labor hour}=\left(\begin{array}{l}\text{Direct labor hour}\times \text{Production time (Product S109)}\\ +\text{Direct labor hour}\times \text{Production time (Product N227)}\end{array}\right)\\ =\left(10,000\times 2+10,000\times 2.8\right)\\ =(20,000+28,000)\\ =\$48,000\end{array}$

Hence, the total labor hours is $48,000.

Calculation of allocation rate:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Total overhead cost}}{\text{Number of labor hours}}\\ =\frac{\$1,008,000}{48,000\text{ hours}}\\ =\$21\text{ per labor hour}\end{array}$

Hence, the allocation rate per labor hour is $21.

b

To determine

Calculate the total overhead cost allocated by the company to each product.

Explanation of Solution

Calculation of overhead cost allocated to each type of product:

Table (1)

Hence, the total allocated cost is $1,008,000.

c

To determine

Explain the reason why the combined total cost is the same in both the requirements and is the ABC system more accurate than the traditional system.

Explanation of Solution

Calculation of total cost of each product line and combined cost of the products:

Table (2)

Hence, the total combined cost is $2,088,000.

Calculation of cost per unit using traditional cost method:

Table (3)

Hence, the costs per unit of product S109 and product N227 are $87 and $121.80.

Working notes:

Calculation of direct material cost for product S109:

$\begin{array}{c}\text{Direct material (product S109)}=\text{Direct material cost}\times \text{Number of units}\\ =\$25\times 10,000\text{ units}\\ \text{=\$250,000}\end{array}$

Hence, the direct material cost for product S109 is $250,000.

(1)

Calculation of direct material cost for product N227:

$\begin{array}{c}\text{Direct material (product N227)}=\text{Direct material cost}\times \text{Number of units}\\ =\$35\times 10,000\text{ units}\\ \text{=\$350,000}\end{array}$

Hence, the direct material cost for product N227 is $350,000.

(2)

Calculation of direct labor cost for product S109:

$\begin{array}{c}\text{Direct labor (product S109)}=\text{Direct labor cost}\times \text{Number of hours}\\ =\$10\times 20,000\text{ hours}\\ \text{=\$200,000}\end{array}$

Hence, the direct labor cost for product S109 is $200,000.

(3)

Calculation of direct labor cost for product N227:

$\begin{array}{c}\text{Direct labor (product N227)}=\text{Direct labor cost}\times \text{Number of hours}\\ =\$10\times 28,000\text{ hours}\\ \text{=\$280,000}\end{array}$

Hence, the direct labor cost for product N227 is $280,000.

(4)

d

To determine

Calculate the price of each product using mark-up value.

Explanation of Solution

Calculation of price for each product:

Table (4)

Hence, the prices of each product using markup are $104.4 and 146.16.

Working notes:

Calculation of mark-up value for Product S109:

$\begin{array}{c}\text{Markup value (product S109)}=\text{Cost per unit}\times 20\%\text{(company price)}\\ =\$87\times \text{20\%}\\ =\$17.4\end{array}$

Hence, the mark-up value for Product S109 is 17.4.

(5)

Calculation of mark-up value for Product N227:

$\begin{array}{c}\text{Markup value (product N227)}=\text{Cost per unit}\times 20\%\text{(company price)}\\ =\$121.80\times \text{20\%}\\ =\$24.36\end{array}$

Hence, the mark-up value for Product N227 is 24.36.

(6)

e

To determine

Calculate the price of each product using mark-up value.

Explanation of Solution

Calculation of overhead cost under ABC system:

Table (5)

Working notes:

Calculation of base rate for unit-level cost:

$\begin{array}{c}\text{Base rate (unit-level)}=\text{Use of cost drive (S109)}+\text{Use of cost drive (N227)}\\ =20,000\text{ hour}+60,000\text{ hour}\\ =80,000\text{ hour}\end{array}$

Hence, the base rate for unit-level cost is 80,000 hours.

(7)

Calculation of base rate for batch-level cost:

$\begin{array}{c}\text{Base rate (batch-level)}=\text{Use of cost drive (S109)}+\text{Use of cost drive (N227)}\\ =1,500\text{ setups}+3,500\text{ setups}\\ =5,000\text{ setups}\end{array}$

Hence, the base rate for batch-level cost is 5,000 setups.

(8)

The calculation of base rate for product-level cost:

$\begin{array}{c}\text{Base rate (product-level)}=\text{Use of cost drive (S109)}+\text{Use of cost drive (N227)}\\ =200\text{ inspectios}+600\text{inspectios}\\ =800\text{inspectios}\end{array}$

Hence, the base rate for product-level cost is 800 inspection.

(9)

Calculation of base rate for facility-level cost:

$\begin{array}{c}\text{Base rate (facility-level)}=\text{Use of cost drive (S109)}+\text{Use of cost drive (N227)}\\ \text{=50\%}+50\%\\ =100\%\end{array}$

Hence, the base rate for facility-level cost is 100%.

(10)

f

To determine

Calculate the total and per unit cost of each product using ABC system.

Explanation of Solution

Calculation of total allocated cost for the product S109:

Table (6)

Hence, the total allocated cost for product S109 is 278,000.

Calculation of total allocated cost for the product N227:

Table (7)

Hence, the total allocated cost for product N227 is 729,600.

Calculation of total cost of each product line and combined cost of the products using ABC system:

Table (8)

Hence, the total combined cost is $2,088,000.

Calculation of cost per unit using ABC method:

Table (9)

Hence, the costs per unit of product S109 and product N227 are $72.84 and $135.96.

g

To determine

Calculate the revised price for each product.

Explanation of Solution

Calculation of revised price for each product:

Table (10)

Hence, the prices of each product using markup are $87.41 and 163.15.

Working notes:

Calculation of mark-up value for Product S109:

$\begin{array}{c}\text{Markup value (product S109)}=\text{Cost per unit}\times 20\%\text{(company price)}\\ \text{=\$72}\text{.84}\times \text{20\%}\\ \text{=\$14}\text{.56}\end{array}$

Hence, the mark-up value for Product S109 is 14.56.

(11)

Calculation of mark-up value for Product N227:

$\begin{array}{c}\text{Markup value (product N227)}=\text{Cost per unit}\times 20\%\text{(company price)}\\ \text{=\$135}\text{.96}\times \text{20\%}\\ \text{=\$27}\text{.19}\end{array}$

Hence, the mark-up value for Product N227 is 27.19.

(12)

h

To determine

Based on the results from requirements f and g, explain the reason why product N227 costs more and reason for adjusting sales price.

Explanation of Solution

Manufacturing the product N227 is more costly because it requires more machine setups, inspection cost, and machine hours than Product S109. However, the ABC system reveals the accurate cost of the product. Laboratory B needs to adjust its prices in order to sustain in the market for a long term.