Question

Plantwide versus Departmental Rates, Product-Costing Accuracy: Activity-Based Costing 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

Answer 1

1) Overhead Cost per unit using Direct Labour Hours

Overhead Rate per hr = Total Overhead Costs / Total Direct Labour hours
= $990,000 / (140,000 + 300,000 hrs)
= $990,000 / 440,000 hrs
= $2.25 per direct labour hour

Model A

Overhead Cost = 140,000 hrs * 2.25 per hr = $315,000

Overhead Cost per unit = $315,000 / 10,000 units = $31.5 overhead cost per unit

Model B

Overhead Cost = 300,000 hrs * 2.25 per hr = $675,000

Overhead Cost per unit = $675,000 / 100,000 units = $6.75 overhead cost per unit

2) Overhead Cost per unit using ABC

Activity	Driver	Overhead Cost	Cost Driver	Activity Rate
Set ups	Production runs	$270,000	100 runs	$2700 per production run
Inspections	Inspection hrs	$210,000	2,000 hrs	$105 per inspection hour
Machining	Machine hrs	$240,000	220,000 hrs	$1.0909 per machine hr
Maintennance	Maintennance hrs	$270,000	100,000 hrs	$2.7 per maintennance hr

Overhead Assignment

	Model A	Model B
Set Ups	$108,000 (40*2700)	$162,000 (60*2700)
Inspections	$84,000 ( 800 * 105)	$126,000 (1200 * 105)
Machining	$21,818.18 (20,000 * 1.0909)	$218,181.82 (200,000 * 1.0909)
Maintennance	$27,000 ( 10,000 * 2.7)	$243,000 (90,000 * 2.7)
Total Overheads	$240,818.18	$749,181.82
$\div$ Units Produced	10,000	100,000
Overhead Per unit	24.08	$7.49

3) Overhead Cost using Departmental Rates

	Model A	Model B
Department 1 (M/c hrs * $3.50)	$35,000 (10,000 * 3.5)	$595,000 (170,000 * 3.5)
Department 2 (Labour hrs * 0.9)	$117,000 (130,000 * 0.9)	$243,000 (270,000 * 0.9)
Total Overheads	$152,000	$838,000
$\div$ Units Produced	10,000	100,000
Overhead Rate per unit	$15.2	$8.38

4) A common justification is to use machine hours for machine-intensive departments and labor hours for labor-intensive departments. Using activity-based costs as the standard we can say that departmental rates decreased the accuracy of the overhead cost assignment for both products. The departmental rates cost A well below the ABC mehtod while the plantwide rate costs A well above the ABC mehod. Howwever, the rates of difference are very close. Looking at it this way, department costs are not clearly more wrong than the plantwide rate ; they are wrong in a different direction. The deparmental rates assigned do better than the plantwide rates.