Question

Question #3 The lead accountant has compiled the following data in preparation for allocating overhead to three cost drivers. Overhead Costs $110,000 Utilities (phone, electric, water, gas, etc.) $1,020,000 CEO, VPs, Sunervisors, Secretary staff costs $870,000 Building lease & equipment $2,000,000 Utilities Admin/MGMT Factory Costs 2,000 00p A. Allocate the $t500.000 of monthly overhead costs to the following three cost drivers: 1) Units Produced 2) Direct Labor Hours 3) Raw Material Costs to determine the final product cost per unit (which includes Direct Labor, Raw Materials, and Overhead) Std Labor Rate ($/hr): $30.00 Labor Hrs Per Widget Direct Labor Cost per Widget Widget-1 Widget-2 4 $120.00 $240.00 8 Widget-3 $480.00 16 Drivers Widget-1 Widget-2 25,000 15,000 units per month 45,000 Units Produced in Factory (all inclusive) units per month 5,000 Widget-3 units per month Widget-1 Widget-2 Widget-3 100,000 Direct Labor Hours 300,000 hours per month 120,000 hours per month 80,000 hours per month per unit of Widget-1 per unit of Widget-2 per unit of Widget-3 B. Which of the three methods causes the Final Product Cost of Widget-3 to exceed $800? In 30 words or less, why did this occur? C. If the current sales price of Widget-3 is only $800, as the lead accountant, name at least TWO strategies you should consider to make Widget-3 a more viable product to sell/produce (increasing the sales price isS not an option due to competitiveness of market)? Raw Material Costs $25.00 $50.00 $200.00

Answer 1

Part-A: Allocation of Overhead Costs on the basis of three Cost Drivers:

Allocation of monthly overheads of $20,00,000 on the basis of units produced:

Overhead Cost per unit of Widget produced = Total Overhead Costs/Total units of Widget produced

= 20,00,000/45,000

= $44.4444 p.u.

Allocation of monthly overheads of $20,00,000 on the basis of units produced:
	Widget-1	Widget-2	Widget-3	Total
Units produced (1)	25000	15000	5000	45000
Overhead Cost p.u. of Widget Produced (2)	44.4444	44.4444	44.4444	44.4444
Overhead Cost allocated to each product (3) = (1)*(2)	1111110	666666	222222	1999998

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Allocation of monthly overheads of $20,00,000 on the basis of direct labor hours:

Overhead Cost per unit of direct labor hours worked = Total Overhead Costs/Total labor hours worked

= 20,00,000/3,00,000

= $6.6667 per direct labor hour.

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Allocation of monthly overheads of $20,00,000 on the basis of direct labor hours worked:
	Widget-1	Widget-2	Widget-3	Total
Direct Labor Hours Worked(1)	100000	120000	80000	300000
Overhead Cost per Labor Hour Worked (2)	6.6666	6.6666	6.6666	6.6666
Overhead Cost allocated to each product (3) = (1)*(2)	666660	799992	533328	1999980
Units Produced (4)	25000	15000	5000	45000
Overhead Cost p.u. of Widget Produced (5) = (3)/(4)	26.6664	53.3328	106.6656

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Allocation of monthly overheads of $20,00,000 on the basis of Raw Material Costs:

Overhead Cost per Dollar of Raw Material Cost = Total Overhead Costs/Total Raw Material Cost

= 20,00,000/(25*25000 + 50*15000 + 200*5000)

= 20,00,000/23,75,000

= $0.842105 per dollar of raw material cost

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Allocation of monthly overheads of $20,00,000 on the basis of raw material costs:
	Widget-1	Widget-2	Widget-3	Total
Raw material cost (1)	625000	750000	1000000	2375000
Overhead Cost per dollar of Raw Material Cost(2)	0.842105	0.842105	0.842105	0.842105
Overhead Cost allocated to each product (3) = (1)*(2)	526315.8	631578.9	842105.3	2000000
Units Produced (4)	25000	15000	5000	45000
Overhead Cost p.u. of Widget Produced (5) = (3)/(4)	21.05263	42.10526	168.4211

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Part-B:

Cost p.u. of Widget-3 when overheads are allocate on the basis of units produced:	P.U. ($)
Raw Material Cost	200
Direct Labor Cost	480
Overhhead Cost	44.4444
Total Cost per unit	724.4444
Cost p.u. of Widget-3 when overheads are allocate on the basis of direct labor hours worked:	P.U. ($)
Raw Material Cost	200
Direct Labor Cost	480
Overhhead Cost	106.6656
Total Cost per unit	786.6656
Cost p.u. of Widget-3 when overheads are allocate on the basis raw materials costs:	P.U. ($)
Raw Material Cost	200
Direct Labor Cost	480
Overhhead Cost	168.4211
Total Cost per unit	848.4211

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When Overhead Costs are allocated on the basis of Raw Material Cost , the Final Product Cost of Widget exceeds $800 (i.e. $848.42).

Reason:-Raw Material Cost is high in case of Widget-3 as compared to Labor Cost & Units Produced of Widget -3

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Part-C:

Two strategies to make Widget-3 more viable product are:

1)Decrease Total Overhead Costs

2)Allocation of Overhead Costs on the basis of Activity Based Costing.