Question

Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A's production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data has been gathered for the two products:

	Product Data
	Model A	Model B
Units produced per year	10,000	100,000
Prime costs	$148,000	$1,480,000
Direct labor hours	135,000	300,000
Machine hours	21,000	197,000
Production runs	40	50
Inspection hours	1,000	1,400
Maintenance hours	9,000	91,000
Overhead costs:
Setup costs	$252,000
Inspection costs	276,000
Machining	289,500
Maintenance	270,000
Total	$1,087,500

	Required:
1.	Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Round to two decimal places.)
2.	Compute the overhead cost per unit for each product by using ABC. (Round rates and unit overhead cost to two decimal places.)
3.	Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine intensive) with a rate of $3.40 per machine hour and Department 2 (labor intensive) with a rate of $1.00 per direct labor hour. The consumption of these two drivers is as follows:

	Department 1	Department 2
	Machine Hours	Direct Labor Hours
Model A	10,000	135,000
Model B	190,000	260,000

	Compute the overhead cost per unit for each product by using departmental rates. (Round to two decimal places.)
4.	CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?

Answer 1

Using the information given in the problem,I have calculated overhead cost per unit for each product using plantwide rate based on direct labor hours, Activity based costs and departmental rates as given.

1 Ramsey Company 2 3 1. Calculation of overhead cost per unit for each product using a plantwide rate 4 based on direct labour hours 5 Information given in the problem 6 Total overhead cost 1087500 7 Total direct labour hours 435000 8 Model A 135000 9 Model B 300000 10 Total 435000 11 12 Predetermined overhead rate based on direct labour hours: 13 Total overhead cost 1087500 2.50 14 Total direct labour hours 435000 15 16 Model A Model B 17 Direct labour hours 135000 300000 18 Predetermined overhead rate 2.5 2.5 19 overhead cost 337500 750000 20 units produced per year 10000 100000 21 overhead cost per unit 33.75 7.5 (337500/ (750000/ 10000) 100000) 22

3 2. Calculation of overhead cost per unit for each product using ABC 5 4 Information given in the problem 5 1 6 Overhead costs: Activity driver 7 Setup costs 252000 Production runs 8 Inspection costs 276000 Inspection hours 9 Machining 289500 Machine hours 10 Maintenance 270000 Maintenance hours 11 Total 1087500 34 Model A Model B Total(3+4) 50 90 1000 1400 2400 21000 197000 218000 9000 91000 100000 Overhead Overhead Activity driver Model A rate costs Production runs 40 2800.00 112000.00 Inspection hours | 1000 115.00 115000.00 Machine hours 210001 1.33 27887.61 Maintenance hours 9000 2.70 24300.00 Total overhead costs 279187.61 units produced per year 10000 Overhead cost per unit 27.92 (279187.61/10000) 13 Overhead rate per activity cost driver 14 Overhead costs Activity driver 15 Setup costs Production runs 16 Inspection costs Inspection hours 17 Machining Machine hours 18 Maintenance Maintenance hours 19 Overhead costs/Activity driver Overhead rate 252000/90 2800.00 per Production runs 276000/2400 115.00 per Inspection hours 289500/218000 1.33 per Machine hours 270000/100000 2.70 per Maintenance hours Overhead Overhead Activity driver Model B rate costs Production runs 50 2800.00 140000 Inspection hours 14001 115.00 161000 Machine hours 197000 1.33 261612.39 Maintenance hours 91000 2.70 245700 Total overhead costs 808312.39 units produced per year 100000 Overhead cost per unit 8.08 (808312.39/100000

3. Calculation of overhead cost per unit for each product using departmental rates Information given in the problem Department 1(machine intensive) with a rate of $3.4 per machine hour Department 2(labor intensive) with a rate of $1.00 per labor hour Model A 34000 Department 1(machine intensive) rate per machine hour 10000 3.4 Department 2(labor intensive) rate per labor hour 135000 Total overhead costs units produced per year 135000 169000 10000 Overhead cost per unit 16.90 Model B 646000 Department 1(machine intensive) rate per machine hour 190000 3.4 Department 2(labor intensive) rate per labor hour 260000 1 Total overhead costs units produced per year 260000 906000 100000 Overhead cost per unit 9.06

24 25 4. Activity based costing uses the appropriate activity driver to allocate the overhead cost to each of the 26 products which is more accurate in product costing when compared to using the departmental rates 27 which uses only two activity driver to allocate the overhead costs. 28 Since the production of each product uses labor hours and machine hours, departmental rates 29 would be better than plantwide rate based on only labor hours. 20