Question

Problem 17-1A Comparing costs using ABC with the plantwide overhead rate LO P1, P3, A1, A2

The following data are for the two products produced by Tadros Company.

	Product A			Product B
Direct materials	$	15 per unit		$	24 per unit
Direct labor hours		0.3 DLH per unit			1.6 DLH per unit
Machine hours		0.1 MH per unit			1.2 MH per unit
Batches		125 batches			225 batches
Volume		10,000 units			2,000 units
Engineering modifications		12 modifications			58 modifications
Number of customers		500 customers			400 customers
Market price	$	30 per unit		$	120 per unit

The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows.

	Costs			Driver
Indirect manufacturing
Engineering support	$	24,500		Engineering modifications
Electricity		34,000		Machine hours
Setup costs		52,500		Batches
Nonmanufacturing
Customer service		81,000		Number of customers

Required:

(Loss amounts should be indicated with minus sign. Round your per unit cost answers to 2 decimal places.)

Which method of product costing gives better information to managers of this company?

Answer 1

a) Estimated total mfg. overhead cost Estimated direct labor hours Predetermined overhead rate/DLH $192,000 [$24500 + $34000 + $52500 + $81000] 6,200 [(10000 units x 0.3 DLH) + (2000 units x 1.6 DLH)] $30.97 ($192000 / 6200 DLHs] Product A 0.3 Product B 1.6 Direct labor hours per unit Therefore, Direct material cost Direct labor per unit Overhead costs per unit Unit cost $15.00 $6.00 $9.29 $30.29 $24.00 $32.00 $49.55 $105.55 [Given] [0.3 DLHs x $20; 1.6 DLHs x $20] [0.3 DLHs x $30.97; 1.6 DLHs x $30.97] b) 70 Activity Cost Pool Engineering support Electricity Setup costs Customer service Cost Driver Eng. modifications Machine hours Batches Number of customers Activity Cost $24,500 $34,000 $52,500 $81,000 Volume Activity Rate $350 ($24500 / 70] 3,400 $10 ($34000 / 3400] 350 $150 ($52500 / 350] 900 $90 ($81000 / 900] NOTE:

Volume for engineering modifications = 12 + 58 = 70; batches = 125 + 225 = 350. Volume for machine hours = (10000 units x 0.1 MHS) + (2000 units x 1.2 MHS) = 3400 MHs. Volume for number of customers = 500 + 400 = 900. Therefore, 12 Activity Activity Overhead costs assigned to Product A: Rate Usage Engineering support $350 Electricity $10 1,000 Setup costs $150 125 Customer service $90 500 Overhead costs assigned to Product A: Direct material cost Direct labor per unit Total product costs assigned to Product A # of units produced Unit Cost Activity Cost $4,200 [$350 x 12] $10,000 ($10 x 1000] $18,750 ($150 x 125] $45,000 [$90 x 500] $77,950 $150,000 (10000 x $15] $60,000 [10000 x $6 (As calculated in Part-(a))] $287,950 10,000 $28.80 ($287950 / 10000 units]

58 Activity Activity Overhead costs assigned to Product B: Rate Usage Engineering support $350 Electricity $10 2,400 Setup costs $150 225 Customer service $90 400 Overhead costs assigned to Product B: Direct material cost Direct labor per unit Total product costs assigned to Product B # of units produced Unit Cost Activity Cost $20,300 [$350 x 58] $24,000 ($10 x 2400] $33,750 ($150 x 225] $36,000 ($90 x 400] $114,050 $48,000 [2000 x $24] $64,000 [2000 x $32 (As calculated in Part-(a))] $226,050 2,000 $113.03 $226050 / 2000 units] c) Tadros Company should adopt activity-based-cost overhead allocation method to allocate overhead costs between the products because this method allocates overhead costs rationally based on actual usage of drivers. In other words, Activity-based-costing method of product costing gives better information to managers of this company.