FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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P9.1 (LO 1, 2, 3), AP When Jasmine realized how small the margin was for her main product, she was aghast. She knew the company had already achieved significant direct materials savings by partnering with its supplier. The consultant brought in last year further streamlined labor usage, bringing her to best-in-class levels for labor. The only other area to look at was overhead .
Total MOH costs this coming year are estimated at $2,100,000. Three key activities are the primary causes of total MOH. They are identified as follows, including the budgeted cost, budgeted cost driver, and budgeted cost driver quantities for each.
Activity Budgeted Cost Budgeted Quantity of Cost Driver Main Product’s Use of Cost Driver
Cutting $ 600,000 60,000 machine hours 8,000
Fabrication 1,200,000 120,000 direct labor hours 20,000
Inspection 300,000 20,000 inspection hours 2,000
Total $2,100,000
Required
Assuming the company uses one plant-wide rate based on DL hours to allocate MOH, calculate that rate and determine total allocated MOH for the main product.
If the company instead breaks MOH into the key activities above, calculate the appropriate activity rates and subsequent allocated overhead cost to the main product.
Compare the allocations using the plant-wide rate versus the activity-based rates. Do the ABC allocations alleviate any of Jasmine’s concerns about the low margin of this product?
What additional insight does the activity information provide to Jasmine as she considers the margin for this product?
Transcribed Image Text:### Activity-Based Costing Application and Analysis
**Scenario Overview:**
Jasmine, upon realizing the low margin of her main product, discovered that the company's overhead cost was the last area to be optimized after achieving savings in direct materials and labor. The estimated total Manufacturing Overhead (MOH) costs for the coming year are $2,100,000, linked to three key activity areas.
**Activity Cost Breakdown:**
| **Activity** | **Budgeted Cost** | **Budgeted Quantity of Cost Driver** | **Main Product’s Use of Cost Driver** |
|------------------|-------------------|-------------------------------------|---------------------------------------|
| Cutting | $600,000 | 60,000 machine hours | 8,000 |
| Fabrication | $1,200,000 | 120,000 direct labor hours | 20,000 |
| Inspection | $300,000 | 20,000 inspection hours | 2,000 |
| **Total** | **$2,100,000** | | |
**Required Analysis:**
a. **Plant-Wide Overhead Rate Calculation:**
- Assuming a plant-wide rate based on direct labor hours (DL hours), calculate the rate and determine total allocated MOH for the main product.
b. **Activity-Based Costing (ABC) Rate Calculation:**
- Calculate activity rates if the company utilizes activity-based costing for the activities listed. Subsequently, allocate overhead costs to the main product.
c. **Comparative Analysis:**
- Compare allocations derived from plant-wide rate and activity-based costing. Determine if the ABC method helps mitigate any concerns related to the low product margin.
d. **Additional Insights:**
- Analyze what further insights the activity-based information provides Jasmine as she considers the margin for her product.
This exercise intends to help understand the financial impacts of different overhead allocation methods and their implications for product profitability.
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