Chapter 9, Problem 65P

a.

To determine

Ascertain the unit cost for each of the three jobs started and completed using the current costing system.

Explanation of Solution

Activity-based costing:

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.

Ascertain the unit cost for each of the three jobs started and completed using the current costing system:

Using the machine-hours, the predetermined rate using the traditional system is calculated. $80 per machine hour $\left(\frac{\$16,000,000}{\$200,000}\right)$ is the predetermined overhead rate.

Using the traditional system, the cost of each of the jobs are:

Particulars	Job 0404	Job 0407	Job 0411
Direct materials	$30,000	$56,000	$100,000
Overhead (@$80%)	128,000	160,000	320,000
Total cost	$158,000	$216,000	$420,000
Number of units	1,000	1,200	2,000
Unit cost	$158	$180	$210

Table: (1)

Working Note (1):

Calculate the overhead for Job 0404.

$\begin{array}{c}\text{Overhead for Job 0404 = \$80 per machine hour}\times 1,6\text{00 machine-hours}\\ =\$128,000\end{array}$

Hence, the unit cost for each of the three jobs started and completed are $158, $180, and $210, respectively.

b.

To determine

Ascertain the unit cost for each of the three jobs started and completed using the ABC system.

Explanation of Solution

Compute the unit product cost:

Particulars	Job 0404	Job 0407	Job 0411
Direct materials	$30,000	$56,000	$100,000
Overhead:
Material handling	15,000(2)	28,000	50,000
Machining	48,000(3)	60,000	120,000
Finishing	16,000(4)	19,200	32,000
Shipping	15,000(5)	30,000	15,000
Setups	20,000(6)	60,000	20,000
Total costs	$144,000	$253,200	$337,000
Number of units	1,000	1,200	2,000
Unit cost	$144.00	$211.00	$168.50

Table: (2)

Working Note (2):

Calculate the material handling overhead.

$\begin{array}{c}\text{Material handling = 50\% direct material cost}\left(7\right)\times \$30,000\\ =\$15,000\end{array}$

Working Note (3):

Calculate the machining overhead.

$\begin{array}{c}\text{Machining = Cost per machine-hour}\left(8\right)\times \text{Total machine-hours}\\ =\text{\$30}\times 1,600\\ =\$48,000\end{array}$

Working Note (4):

Calculate the Finishing overhead.

$\begin{array}{c}\text{Finishing = \$16 per unit}\left(9\right)\times 1,000\text{units}\\ =\$16,000\end{array}$

Working Note (5):

Calculate the Shipping overhead.

$\begin{array}{c}\text{Shipping = \$15,000 per order}\left(10\right)\times \text{1 order}\\ =\$15,000\end{array}$

Working Note (6):

Calculate the Setups overhead.

$\begin{array}{c}\text{Setups = \$20,000 per production run}\left(11\right)\times 1\text{production run}\\ =\$20,000\end{array}$

Working Note (7):

Calculate the proportion of direct material cost.

$\begin{array}{c}\text{Material handling = }\frac{\text{\$3,000,000}}{\$6,000,000\text{direct materials}}\\ =50\%\text{direct material cost}\end{array}$

Working Note (8):

Calculate the cost per machine-hour.

$\begin{array}{c}\text{Machining = }\frac{\$6,000,000}{200,000\text{machine-hours}}\\ =\$30\text{per machine-hour}\end{array}$

Working Note (9):

Calculate the cost per unit.

$\begin{array}{c}\text{Finishing = }\frac{\$2,000,000}{125,000\text{units}}\\ =\$16\text{per unit}\end{array}$

Working Note (10):

Calculate the cost per order.

$\begin{array}{c}\text{Shipping = }\frac{\$1,500,000}{100\text{orders}}\\ =\$15,000\text{per order}\end{array}$

Working Note (11):

Calculate the cost per run.

$\begin{array}{c}\text{Setups = }\frac{\$3,500,000}{175\text{runs}}\\ =\$20,000\text{per run}\end{array}$