Question

Exercise 17-13 Comparing costs under ABC to traditional plantwide overhead rate LO P1, P3 Smythe Co. makes furniture. The following data are taken from its production plans for the year. Direct labor costs Hazardous waste disposal costs $5,340,000 615,000 Expected production Direct labor hours required Hazardous waste disposed Chairs 206, Dee units 268,000 DLH 300 pounds Tables 15.000 units 15,400 DLH 400 pounds Required: 1. Determine the hazardous waste disposal cost per unit for chairs and for tables if costs are assigned using a single plantwide Overhead rate based on direct labor hours Product Activity Driver el OH S per direct labor hour Total Overhead Cost Units Produced OH Cost per unit Chairs Tables 2. Determine hazardous waste disposal costs per unit for chairs and for tables if costs are assigned based on the number of pounds disposed of Product Activity Driver OHS per pound Total Overhead Cost Units Produced OH Cost per unit Chairs Tables

Answer 1

1. Determine the hazardous waste disposal cost per unit for chairs and for tables if costs are assigned using single plantwide overhead rate based on direct labor hours.
Overhead costs	$615,000	$2.17 [$615,000 / 283,400]	per direct labor hour
Direct labor hours         [268,000 + 15,400]	283,400
Product	Activity Driver (a)	OH $ per direct labor hour (b)	Total Overhead Cost (c = a x b)	Units Produced (d)	OH Cost per unit (c / d)
Chairs	268,000	$2.17	$581,560	206,000	$2.82
Table	15,400	$2.17	$33,418	15,000	$2.23
2. Determine hazardous waste disposal costs per unit for chairs and for tables if costs are assigned based on the number of pounds disposed of
Overhead costs	$615,000	$878.57 [$615,000 / 700]	per pound
Number of pounds                   [300 + 400]	700
Product	Activity Driver (a)	OH $ per pound (b)	Total Overhead Cost (c = a x b)	Units Produced (d)	OH Cost per unit (c / d)
Chairs	300	$878.57	$263,571	206,000	$1.28
Table	400	$878.57	$351,428	15,000	$23.43

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3. Which method is better for assigning costs to each product?

Answer: Assignment based on the number of pounds

Reason: Since the waste disposal costs are more likely to be driven by the number of pounds disposed of versus the direct labor hours incurred.