(a) Estimated Overhead Cost

Transcription

1 Exercise 3-8 (30 minutes) 1. Entry is the amount of actual manufacturing overhead cost incurred during the year. Debits to Manufacturing represent actual overhead costs incurred and credits represent overhead applied to products. 2. The activity rates would be computed as follows: Estimated Cost Expected Cost Pool Labor related... $280,000 40,000 DLHs $7 per DLH Purchase orders... $90,000 1,500 orders $60 per order Parts management... $120, part types $300 per part type Board etching... $360,000 2,000 boards $180 per board General factory... $400,000 80,000 MHs $5 per MH 3. Computation of the manufacturing overhead cost applied to production: Actual Applied Cost Pool Labor related... $7 per DLH 41,000 DLHs $ 287,000 Purchase orders... $60 per order 1,300 orders 78,000 Parts management. $300 per part type 420 part types 126,000 Board etching... $180 per board 2,150 boards 387,000 General factory... $5 per MH 82,000 MHs 410,000 Total... $1,288, The overhead overapplied or underapplied can be computed as follows: Actual overhead incurred... $1,302,000 applied... 1,288,000 underapplied... $ 14,000 Solutions Manual, Chapter 3 1

2 Exercise 3-9 (30 minutes) The overhead applied to each product can be computed as follows: Product A Actual Applied Cost Pool Labor related... $7/DLH 8,000 DLHs $ 56,000 Purchase orders... $60/order 100 orders 6,000 Parts management. $300/part type 20 part types 6,000 Board etching... $180/board 0 boards 0 General factory... $5/MH 16,000 MHs 80,000 Total... $148,000 Product B Actual Applied Cost Pool Labor related... $7/DLH 12,000 DLHs $ 84,000 Purchase orders... $60/order 300 orders 18,000 Parts management. $300/part type 90 part types 27,000 Board etching... $180/board 1,500 boards 270,000 General factory... $5/MH 24,000 MHs 120,000 Total... $519,000 Product C Actual Applied Cost Pool Labor related... $7/DLH 15,000 DLHs $105,000 Purchase orders... $60/order 400 orders 24,000 Parts management. $300/part type 200 part types 60,000 Board etching... $180/board 650 boards 117,000 General factory... $5/MH 30,000 MHs 150,000 Total... $456,000 2 Introduction to Managerial Accounting, 3rd Edition

3 Exercise 3-9 (continued) Product D Actual Applied Cost Pool Labor related... $7/DLH 6,000 DLHs $ 42,000 Purchase orders... $60/order 500 orders 30,000 Parts management. $300/part type 110 part types 33,000 Board etching... $180/board 0 boards 0 General factory... $5/MH 12,000 MHs 60,000 Total... $165,000 Note that the sum of the overhead costs applied to the individual products ($148,000 + $519,000 + $456,000 + $165,000) equals the total amount of overhead applied ($1,288,000). Solutions Manual, Chapter 3 3

4 Exercise 3-10 (45 minutes) 1. The unit product costs under the company's conventional costing system would be computed as follows: Rascon Parcel Total Number of units produced... 20,000 80,000 Direct labor-hours per unit Total direct labor-hours... 8,000 16,000 24,000 Total manufacturing overhead... $576,000 Total direct labor-hours... 24,000 DLHs Predetermined overhead rate.. $ per DLH Rascon Parcel Direct materials... $13.00 $22.00 Direct labor Manufacturing overhead applied: 0.40 DLH per unit $24.00 per DLH DLH per unit $24.00 per DLH Unit product cost... $28.60 $ Introduction to Managerial Accounting, 3rd Edition

5 Exercise 3-10 (continued) 2. The unit product costs with the proposed ABC system can be computed as follows: Cost Pool Estimated Cost* Expected Labor related... $288,000 24,000 direct labor-hours $12.00 per direct labor-hour Engineering design ,000 6,000 engineering-hours $48.00 per engineering-hour $576,000 *The total overhead cost is split evenly between the two activity cost pools. Rascon Parcel Expected Expected Amount Amount Labor related, at $12.00 per direct labor-hour... 8,000 $ 96,000 16,000 $192,000 Engineering design, at $48.00 per engineering-hour.. 3, ,000 3, ,000 Total overhead cost assigned... $240,000 $336,000 Number of units produced... 20,000 80,000 cost per unit... $12.00 $4.20 Solutions Manual, Chapter 3 5

6 Exercise 3-10 (continued) The unit product costs combine direct materials, direct labor, and overhead costs: Rascon Parcel Direct materials... $13.00 $22.00 Direct labor Manufacturing overhead (see above) Unit product cost... $31.00 $ The unit product cost of the high-volume product, Parcel, declines under the activity-based costing system, whereas the unit product cost of the low-volume product, Rascon, increases. This occurs because half of the overhead is applied on the basis of engineering design hours instead of direct labor-hours. When the overhead was applied on the basis of direct labor-hours, most of the overhead was applied to the high-volume product. However, when the overhead is applied on the basis of engineering-hours, more of the overhead cost is shifted over to the low-volume product. Engineeringhours is a product-level activity, so the higher the volume, the lower the unit cost and the lower the volume, the higher the unit cost. 6 Introduction to Managerial Accounting, 3rd Edition

7 Problem 3-12A (75 minutes) 1. The company s estimated total direct labor-hours for the year can be computed as follows: Deluxe model: 5,000 units 1.6 DLH per unit... 8,000 Regular model: 40,000 units 0.8 DLH per unit.. 32,000 Total direct labor-hours... 40,000 Using direct labor-hours as the allocation base, the predetermined overhead rate would be: Predetermined = Total manufacturing overhead overhead rate Total direct labor-hours $2,000,000 = =$50 per DLH 40,000 DLHs The unit product costs are computed as follows: Deluxe Regular Direct materials... $150 $112 Direct labor Manufacturing overhead: $50 per DLH 1.6 DLHs $50 per DLH 0.8 DLHs Unit product cost... $246 $ rates can be computed as follows: Estimated Cost Expected Cost Pool Purchase orders... $84,000 1,200 orders $70 per order Rework requests... $216, requests $240 per request Product testing... $450,000 15,000 tests $30 per test Machine related... $1,250,000 50,000 MHs $25 per MH Solutions Manual, Chapter 3 7

8 Problem 3-12A (continued) 3. a. Deluxe Regular Expected Expected Amount Amount Purchase orders, at $70 per order $ 28, $ 56,000 Rework requests, at $240 per request , ,000 Product testing, at $30 per test... 4, ,000 11, ,000 Machine related, at $25 per MH... 20, ,000 30, ,000 Total overhead cost assigned... $720,000 $1,280,000 Number of units produced... 5,000 40,000 cost per unit... $144 $32 b. Using activity-based costing, the unit product costs would be: Deluxe Regular Direct materials... $150 $112 Direct labor Manufacturing overhead (see above) Unit product cost... $310 $152 8 Introduction to Managerial Accounting, 3rd Edition

9 Problem 3-12A (continued) 4. Unit product costs are distorted as a result of using direct labor-hours as the base for applying overhead costs to products. Although the deluxe model requires twice as much labor time as the regular model, it still is not being assigned enough overhead cost according to the activitybased costing system. According to the activity-based costing system, the deluxe model is more expensive to manufacture than the company thought. Note that the deluxe model accounts for 40% of the machine-hours worked, although it represents a small part of the company s total output. Also, it consumes a disproportionately large amount of the other activities. When activity-based costing is used in place of direct labor-hours as the basis for assigning overhead cost to products, the unit product cost of the deluxe model jumps up from $246 to $310. If the $246 figure is being used as the basis for pricing, then the selling price may be too low for the deluxe model. This may be the reason why profits have been declining for the last several years. It may also be the reason why sales of the deluxe model have been increasing rapidly. Solutions Manual, Chapter 3 9

10 Problem 3-17A (75 minutes) 1. a. When direct labor-hours are used to apply overhead costs to products, other factors affecting the incurrence of overhead costs are ignored. The company s predetermined overhead rate would be: Predetermined = Total manufacturing overhead overhead rate Total direct labor-hours $1,800,000 = =$50 per DLH 36,000 DLHs b. The unit product costs are computed as follows: X200 X99 Direct materials... $ 72 $ 50 Direct labor: $10 per DLH 1.8 DLHs.. 18 $10 per DLH 0.9 DLHs.. 9 Manufacturing overhead: $50 per DLH 1.8 DLHs.. 90 $50 per DLH 0.9 DLHs.. 45 Unit product cost... $180 $ a. rates can be computed as follows: Estimated Cost Expected Cost Pool Machine setups... $360, setups $2,400 per setup Special processing... $180,000 12,000 MHs $15 per MH General factory... $1,260,000 36,000 DLHs $35 per DLH 10 Introduction to Managerial Accounting, 3rd Edition

11 Problem 3-17A (continued) X200 X99 Machine setups: $2,400 per setup 50 setups... $120,000 $2,400 per setup 100 setups... $ 240,000 Special processing: $15 per MH 12,000 MHs ,000 $15 per MH 0 MHs... 0 General factory: $35 per DLH 9,000 DLHs ,000 $35 per DLH 27,000 DLHs ,000 Total overhead cost... $615,000 $1,185,000 Number of units produced... 5,000 30,000 cost per unit... $ $39.50 b. The unit product costs would now be computed as follows, starting with the computation of the manufacturing overhead: X200 X99 Direct materials... $ $50.00 Direct labor: $10 per DLH 1.8 DLHs $10 per DLH 0.9 DLHs Manufacturing overhead (see above) Unit product cost... $ $ It is important to note that, even under activity-based costing, 70% of the company s overhead costs continue to be applied to products on the basis of direct labor-hours: Machine setups (number of setups)... $ 360, % Special processing (machine-hours) , General factory (direct labor-hours)... 1,260, Total... $1,800, % Solutions Manual, Chapter 3 11

12 Problem 3-17A (continued) Thus, the shift in overhead cost from the high-volume product X99 to the low-volume product X200 occurred as a result of reassigning only 30% of the company s overhead costs. The increase in unit cost of X200 can be explained as follows: First, where possible, overhead costs have been traced to the products rather than being lumped together and spread uniformly over all units. Therefore, special processing costs, which are all due to processing X200, have been assigned to the X200 and none to X99 under the activity-based costing approach. Second, the costs associated with the batch-level activity (machine setups) have been assigned on the basis of setups rather than direct labor-hours. Each setup, regardless of the batch size, is assigned the same amount of machine setup cost. Some products are produced in large batches and some are produced in small batches. The smaller the batch, the higher the per unit cost of the batch activity. In this example, the data can be analyzed as follows: X200: Machine setup cost from ABC system... $2,400 per setup Average number of units per setup 5,000 units 50 setups units per setup Average setup cost per unit... $24 per unit X99: Machine setup cost from ABC system... $2,400 per setup Average number of units per setup 30,000 units 100 setups units per setup Average setup cost per unit... $8 per unit Thus, the average setup cost per unit is three times as great for X200 as for X99. Such differences in cost are obscured when direct labor-hours (or any similar measure of volume) is used as the basis for applying overhead costs to products. 12 Introduction to Managerial Accounting, 3rd Edition