3. This part of the case is open-ended, but students should provide data
such as given below.
Overhead rates for the activities are:
(a)
Estimated
(a) ÷ (b)
Overhead
Predetermined
Activity
Costs (b)
Expected Activity
Overhead Rate
Machine setups .. $208,000 1,600 setups $130.00 per setup
Quality control ... $360,000 9,000 inspections $40.00 per inspection
Purchase orders . $90,000 1,200 orders $75.00 per order
Soldering... $450,000 200,000 joints $2.25 per joint
Shipments ... $132,000 600 shipments $220.00 per shipment
Machine related . $560,000 70,000 MHs $8.00 per MH
Case 8-32 (continued)
Overhead cost assigned to each product:
X-20
Activity Rate Expected Activity Amount
Machine setups ... $130.00 per setup 1,000 setups $130,000
Quality inspections ... $40.00 per inspection 4,000 inspections 160,000
Purchase orders ... $75.00 per order 840 orders 63,000
Soldering ... $2.25 per joint 60,000 joints 135,000
Shipments ... $220.00 per shipment 400 shipments 88,000
Machine related ... $8.00 per MH 30,000 MHs 240,000
Total overhead cost (a)... $816,000
Number of units produced (b) ... 30,000
Overhead cost per unit (a) ÷ (b) .. $27.20
Y-30
Machine setups ... $130.00 per setup 600 setups $ 78,000
Quality inspections ... $40.00 per inspection 5,000 inspections 200,000
Purchase orders ... $75.00 per order 360 orders 27,000
Soldering ... $2.25 per joint 140,000 joints 315,000
Shipments ... $220.00 per shipment 200 shipments 44,000
Machine related ... $8.00 per MH 40,000 MHs 320,000
Total overhead cost (a)... $984,000
The unit product cost of each product under activity-based costing is
given below. For comparison, the costs computed in part 2 above are
also provided.
Activity-Based
Costing Direct Labor-Hour
Base
X-20 Y-30 X-20 Y-30
Direct materials... $ 50.00 $ 80.00 $ 50.00 $ 80.00
Direct labor... 24.00 36.00 24.00 36.00
Manufacturing overhead ... 27.20 196.80 48.00 72.00
Total unit product cost... $101.20 $312.80 $122.00 $188.00
As shown by the above analysis, unit product costs may have been dis-
torted as a result of using direct labor-hours as the base for assigning
overhead costs to products. These distorted costs may have had a ma-
jor impact on management’s pricing policies and on management’s per-
ception of the margin being realized on each product. According to the
activity-based costing approach, Model Y-30 is being sold at a loss:
Activity-Based
Costing Direct Labor-
Hour Base
X-20 Y-30 X-20 Y-30
Selling price per unit*... $200.00 $250.00 $200.00 $250.00
Less unit product cost
(above)... 101.20 312.80 122.00 188.00
Gross margin (loss) ... $ 98.80 ($62.80) $ 78.00 $ 62.00
*Total sales ÷ the number of units sold.
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