Question

Use of the weaving/sewing machines is believed to drive MOH costs. At the beginning of the year, the total estimated MOH cost for production of the wristbands is $68,200, and the estimated machine hours were 5,000 for Basic wristbands and 1,200 for Premium wristbands. At the end of the year you can see that 28,000 Basic wristband units and 15,000 Premium wristband units were produced. The Basic wristbands used 4,200 machine hours and Premium wristbands used 1,000 machine hours this year.

You agree that the weaving machines seem to drive MOH costs. However, you believe that the weaving machines drive overhead costs through two separate activities: setup and maintenance. Thus, you have compiled the following activity-based data for the Basic and Premium wristbands.

Activity Based Costing Info.
			Estimated activity usage by product:
Activity	Est'd Cost	Allocation Base	Basic Wristbands		Premium Wristbands
Setup	$28,000	# of setups	135	setups	100	setups
Machine       maintenance	$40,200	# of machine hours	5,000	MHrs	1,200	MHrs

During the year, it was noted that Basic wristbands used 4,200 machine hours and 94 setups while Premium wristbands used 1,000 machine hours and 112 setups this year.

a. What is the activity rate for the Setup activity? (Show work; round to the nearest cent.)

b.What is the activity rate for the Machine maintenance activity? (Show your work, and round to the nearest cent.)             

c.How much total overhead was applied per Basic unit under the ABC system?                  (This will require multiple calculations! Show your work, and round to the nearest cent.)             

$_________ overhead per Basic unit.

1. (Fill in the Blank) Comparing your results from #11 parts ‘a’ and ‘b’ to parts ‘e’ and ‘f’, you have confirmed that the ABC system would be more accurate.

Specifically, you have discovered that the current system, which uses a single POHR, is ________ (over- or under-) applying MOH cost to the Basic wristbands as compared to the ABC system’s applied MOH cost.

Thus, it may be that many other high volume products in Nike’s Sports Gear/Sports Accessories Department are currently shown as having higher overhead costs than they should have because the more complex products (that are lower in volume) often require more of the activities that drive MOH costs.

d.How much total overhead was applied per Premium unit under the ABC system?       (This will require multiple calculations! Show your work, and round to the nearest cent.)

$___________ overhead per Premium unit

.       
  

Answer 1

a.		Calculation of the activity rate for the set up activity
		Estimated Set up cost			$28,000
		No of set ups
		Basic wristbands		135
		Premium wristbands		100
		Total		235
		Activity rate		Total Estimated cost/ No of set ups
				28000/235
				$119.15
b		Estimated Machine Maintenance
		Basic Wristbands		5000
		Premium wristbands		1200
		Total		6200
		Activity rate		Total Estimated cost/ Machine hours
				40200/6200
		Machine hours activity rate		$6.48
c		Overhead per basic unit
			Units
		Basic Wristbands	28000
		Premium wristbands	15000
				Basic Wristbands		Premium wristbands
		Units		28000		15000
		Per set up cost		119.15		119.15
		No of set ups		94		112
		Total set up cost		11200		13345
		per machine hour cost		6.48		6.48
		No of machine hours		4200		1000
		Total machine hour cost		27216		6480
		Total Cost		38416		19825
		(total setup cost+ machine hour cost)
		Per unit cost		38416/28000		19825/15000
		( Total cost/ no of units)
		Per unit cost		$1.37		$1.32
		Overhead per basic unit is $ 1.37 and total overhead is $ 38416
		Overhead per premium unit is $ 1.32 and total overhead is $ 19825