Concept explainers
Consider the following date for two products of Gitano Manufacturing.
Product A | Product B | ||
Number of units produced…………………. | 10,000 units | 2,000 units | |
Direct labor cost (@$24 per DLH)……………….. | 0.20 DLH per unit | 0.25 DLH per unit | |
Direct materials cost… | $2 per unit | $3 per unit | |
Activity | |||
Machine setup…………. | $121,000 | ||
Materials handling….. | 48,000 | ||
Quality control inspections………. | 80,000 | ||
$249,000 |
Required
- Using direct labor hours as the basis for assigning overhead costs, determine the total production cost per unit for each product line.
- If the market price for Product A is $20 and the market price for Product B is $60, determine the profit or loss per unit for each product. Comment on the results.
- Consider the following additional information about these two product lines. If ABC is used for assigning overhead costs to products, what is the cost per unit for Product A and for Product B?
Product A | Product B | |
Number of setups required for production…………….. | 10 setups | 12 setups |
Number of parts required……. | 1 part/ unit | 3 part/unit |
Inspection hours required | 40 hours | 210 hours |
- Determine the profit or loss per unit for each product. Should this information influence company strategy? Explain.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 1:
The total per unit production cost of given product lines using direct labor hours as the basis for allocating overhead costs.
Answer to Problem 10E
Per unit total product cost for Product A is $ 26.72 and of product B is $ 33.90
Explanation of Solution
Product A | Product B | Total | |
Total Direct material cost (a) | $26, 000 | ||
Total Labor hours | 2, 500 hours | ||
Total Labor cost (b) | $60, 000 | ||
Total overhead cost (c ) | 249, 000 | ||
Total production cost (a+b+c) | 267, 200 | 67, 800 | $335, 000 |
Number of units (d) | 10, 000 | 2, 000 | 16, 000 |
Per unit total production cost | $26.72 | $33.90 |
Thus, per unit cost of each product using direct labor hours as the basis of overhead allocation have been computed.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 2:
To compute:
The profit or loss on sale of the given two products.
Answer to Problem 10E
The loss on sale of Product A is $ 6.72 per unit and profit on sale of product B is $26.10 per unit.
As, the overheads have been allocated based on direct labor hours and product A has major production units 10, 000 units as compared to 2, 000 units of Product B, so more overheads have been allocated to Product A than product B. Product A uses less direct labor hours per unit 0.20 DLH as compared to 0.25 DLH of product
Explanation of Solution
Product A | Product B | |
Sale Price per unit | $20 | $60 |
Less. Total cost of production per unit | $26.72 | $33.90 |
Profit /(Loss) per unit | $(6.72) | $26.10 |
Thus, the profit or loss per unit on the sale of both the products has been computed.
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 3:
The unit cost of the given products using ABC method for overhead cost allocation.
Answer to Problem 10E
Per unit total product cost for Product A is $16.58 and of product B is $ 84.60
Explanation of Solution
Overhead cost allocation using ABC
Product A | Product B | Total | |
Machine Set up | $55, 000 | $66, 000 | $121, 000 |
Materials handling | $30, 000 | $18, 000 | $48, 000 |
Quality control inspection | $12, 800 | $67, 200 | $80, 000 |
Total overhead cost | $97, 800 | $151, 200 | $249, 000 |
Overhead cost per unit | 9.78 | $75.6 |
Machine set up cost has been allocated based on number of setups required for production. Total setup numbers = 10+12=22
So, total machine set up cost of Product A = $121, 000/22*10=$55, 000
So, total machine set up cost of Product B = $121, 000/22*12=$66, 000
Materials handling cost has been allocated based on number of parts required for production. Total numbers of parts required = 10, 000+6, 000=16, 000
So, total machine set up cost of Product A = $48, 000/16, 000*10, 000=$30, 000
So, total machine set up cost of Product B = $48, 000/16, 000*6, 000=$18, 000
Quality control inspection cost has been allocated based on number of inspection hours required. Total numbers of parts required = 40+210=250
So, total machine set up cost of Product A = $80, 000/250*40=$12, 800
So, total machine set up cost of Product B = $80, 000/250*210=$67, 200
Computation of per unit total cost
Product A per unit | Product B | |
Direct material cost (a) | $2 | $3 |
Total Labor cost (b) | ||
Total per unit overhead cost (c ) | $9.78 | $75.6 |
Total per unit production cost (a+b+c) | $16.58 | $84.6 |
Concept introduction:
Activity based costing:
Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.
Manufacturing overheads allocation:
Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labour hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Requirement 4:
The profit or loss on sale of the given two products and the company strategy in view of the profit or loss.
Answer to Problem 10E
The profit on sale of Product A is $ 3.42 per unit and loss on sale of product B is $24.60 per unit.
Since, the company is incurring loss on sale of Product B, it should consider increasing the sale price of the product B to prevent losses and have profits.
Explanation of Solution
Product A | Product B | |
Sale Price per unit | $20 | $60 |
Less. Total cost of production per unit | $16.58 | $84.60 |
Profit /(Loss) per unit | $3.42 | ($24.60) |
Want to see more full solutions like this?
Chapter 4 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- The following product costs are available for Kellee Company on the production of eyeglass frames: direct materials, $32,125; direct labor, $23.50; manufacturing overhead, applied at 225% of direct labor cost; selling expenses, $22,225; and administrative expenses, $31,125. The direct labor hours worked for the month are 3,200 hours. A. What are the prime costs? B. What are the conversion costs? C. What is the total product cost? D. What is the total period cost? E. If 6.425 equivalent units are produced, what is the equivalent material cost per unit? F. What is the equivalent conversion cost per unit?arrow_forwardRocks Industries has two products. They manufactured 12,539 units of product A and 8.254 units of product B. The data are: Â What is the activity rate for each cost pool?arrow_forwardRex Industries has two products. They manufactured 12,539 units of product A and 8.254 units of product B. The data are: What is the activity rate for each cost pool?arrow_forward
- The following product costs are available for Stellis Company on the production of erasers: direct materials, $22,000; direct labor, $35,000; manufacturing overhead, $17,500; selling expenses, $17,600; and administrative expenses; $13,400. What are the prime costs? What are the conversion costs? What is the total product cost? What is the total period cost? If 13,750 equivalent units are produced, what is the equivalent material cost per unit? If 17,500 equivalent units are produced, what is the equivalent conversion cost per unit?arrow_forwardHenry Company has established the following standards for the costs of one unit of its product. The standard production overhead costs per unit are based on direct-labor hours. Calculation for standard per unit cost is as follows: Std Cost Std Qty Std Price/Rate Direct Material $ 14.40 6.00 kg $ 2.40/kg Direct Labor $ 3.00 0.40 hour $ 7.50/hour Variable Overhead $ 4.00 0.40 hour $ 10.00/hour Fixed Overhead* $ 4.80 0.40 hour $ 12.00/hour Total $ 26.20 *based on practical capacity of 2,500 direct-labor hour per month During December 2020, Henry purchased 30,000 kg of direct material at a total cost of $75,000. The total wages for December were $20,000, 75% of which were for direct labor. Henry manufactured 4,500 units of product during December 2020, using 28,000kg of the direct material purchased in December and 2,100 direct-labor hours. Actual variable and fixed overhead cost were $23,100 and $25,000, respectively.…arrow_forwardChhom Incorporated, manufactures and cells two products Product F and Product U4 Data concerning the expected production of each product and the expected total direct labor hours (DLH required to produce that output appear below Product F9 Product 04 Total direct labor-hoursi Expected Direct Labor-Hours Total Direct Production 300 600 Activity Cost Pools Labor-related Production orders order size Per Unit 4.0 2.0 The direct labor rate is $25.90 per DLH The direct materials cost per unit is $285 for Product F9 and $244 for Product 4 The company is considering adopting an activity based costing system with the following activity cost pools, activity measures, and expected activity Activity Measures DLHS orders MHS Estimated Overhead Cost Product $ 42,600 67,630 137,820 $ 248,050 Labor-Hours 1,200 1,200 2,400 1,200 400 3,300 Expected Activity Product U 1,200 GOO 3,100 Total 2,400 1,000 4,400arrow_forward
- Henry Company has established the following standards for the costs of one unit of its product. The standard production overhead costs per unit are based on direct-labor hours. Calculation for standard per unit cost is as follows: Std Cost Std Qty Std Price/Rate Direct Material $ 14.40 6.00 kg $ 2.40/kg Direct Labor $ 3.00 0.40 hour $ 7.50/hour Variable Overhead $ 4.00 0.40 hour $ 10.00/hour Fixed Overhead* $ 4.80 0.40 hour $ 12.00/hour Total $ 26.20 *based on practical capacity of 2,500 direct-labor hour per month During December 2020, Henry purchased 30,000 kg of direct material at a total cost of $75,000. The total wages for December were $20,000, 75% of which were for direct labor. Henry manufactured 4,500 units of product during December 2020, using 28,000kg of the direct material purchased in December and 2,100 direct-labor hours. Actual variable and fixed overhead cost were $23,100 and $25,000, respectively. The scheduled production for the month was 5,000…arrow_forward2Given the following data, calculate the total product cost per unit under variable costing. Direct labor S3.50 per unit Direct materials S1.25 per unit Overhead Total variable overhead $41,400 Total fixed overhead $150,000 Expected units to be produced 18,000 units a.$4.75 per unit b.S7.05 per unit C.$15.38 per unit d.$13.08 per unit e.$16 per unitarrow_forwardFor each of the following independent cases (A through E), compute the missing values in the table: Case A BCDE Prime Cost 6,840 11,610 Conversion Cost 11,570 7,930 20,560 Direct Materials $ 2,140 $ 2,300 1,440 3,500 Direct Labor Manufacturing Overhead 1,010 S 3.120 1,910 3,560 7,030 3,050 Total Manufacturing Cost 9,370 5,900arrow_forward
- Consider the below diagram showing production process of Company XYZ: Process A 1.25/hour Process B 2.75/hour Process C Process D 0.5/ minute 3.25/ hour What will be the rate of the production for the company? a) 1.25 per hour b) 3.25 per hour c) 7.75 per hour d) 30 per hourarrow_forwardVijay Company reports the following information regarding its production costs. Direct materials Direct labor $ 11.00 per unit 2$ 21.00 per unit Overhead costs for the year Variable overhead Fixed overhead 2$ 11.00 per unit $ 270,000 30,e00 units Units produced Compute its product cost per unit under absorption costing. (Round your answer t Product cost per unitarrow_forwardX Corp uses ABC to determine unit product cost. The company has two products namely G and N. The company's production for G and N are 1,000 units and 2,000 units, respectively. There are three overhead activity centers with overhead cost and product's activity as follows: <Refer to image> The overhead cost per unit of Product N under ABC is? A. 5.25 B. 10,500 C. 10.00 D. 6.50 E. 20,000arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College