Concept explainers
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
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 1:
The
Answer to Problem 1PSA
The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.
The gross profit per unit of product A is $ 3.63 and product B is $ 35.35
Explanation of Solution
Product A | Product B | Total | |
Direct material cost per unit (a) | 15 | 24 | |
Direct labor hours | 0.3 | 1.6 | |
Direct labor cost per unit @$20 per DLH (b) | |||
Total direct labor hours = |
6, 200 | ||
Total overhead cost allocated | |||
Total overhead cost allocated per unit (c ) | |||
Total production cost (a+b+c) | $26.37 | $84.65 | |
Market price | $30 | $120 | |
Gross profit = |
$3.63 | $35.35 |
Total indirect manufacturing cost/production overhead
Engineering support | 24, 500 |
Electricity | 34, 000 |
Setup costs | 52, 500 |
Total production overheads | $111, 000 |
Thus, per unit manufacturing cost and gross profit 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 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 2:
The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.
Answer to Problem 1PSA
The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75
The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.
Explanation of Solution
Product A | Product B | Total | |
Gross profit per unit | $3.63 | $35.35 | |
Number of units sold | 10, 000 units | 2, 000 units | |
Total gross profit earned | $36, 300 | $70, 700 | $107, 000 |
Number of customers | 500 | 400 | 900 |
Gross profit for each customer | $72.60 | $176.75 | $118.89 |
Cost of servicing each customer | $90 | $90 | |
Net |
$(17.4) | 86.75 |
Total customer service charges=$81, 000
Total number of customer=900
So, cost of servicing each customer =
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 manufacturing cost and gross profit per unit of each product line using ABC.
Answer to Problem 1PSA
The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.
The gross profit per unit of product A is $ 5.70 and product B is $ 24.97
Explanation of Solution
Product A | Product B | Total | |
Direct material cost per unit (a) | 15 | 24 | |
Direct labor hours | 0.3 | 1.6 | |
Direct labor cost per unit @$20 per DLH (b) | |||
Total direct labor hours = |
6, 200 | ||
Machine hours per unit | 0.1 MH | 1.2 MH | |
Total Machine hours required | 3, 400 | ||
Total engineering modifications | 12 | 58 | 70 |
Number of batches | 125 | 225 | 350 |
Engineering support cost allocated (c ) | 24, 500 | ||
Total electricity cost allocated(d) | $34, 000 | ||
Total setup costs allocated (e) | $52, 500 | ||
Total production overhead cost allocated (c+d+e) | $32, 950 | $78, 050 | $111, 000 |
Production overhead per unit (f) | |||
Total production cost (a+b+f) | $24.30 | $95.025 | |
Market price | $30 | $120 | |
Gross profit = |
$5.70 | $24.975 |
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 4:
The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.
Answer to Problem 1PSA
The gross profit generated by each customer for product A is $ 114 and for product B is $124.88
The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.
Explanation of Solution
Product A | Product B | Total | |
Gross profit per unit | $5.70 | $24.975 | |
Number of units sold | 10, 000 units | 2, 000 units | |
Total gross profit earned | $57, 000 | $49, 950 | |
Number of customers | 500 | 400 | 900 |
Gross profit for each customer | $114 | $124.88 | |
Cost of servicing each customer | $90 | $90 | |
Net profit/(loss from each customer) | $24 | $34.88 |
Total customer service charges=$81, 000
Total number of customer=900
So, cost of servicing each customer =
Requirement 5:
To select:
The method of product costing which provides better information to the managers of the company and reasons for the same.
Answer to Problem 1PSA
Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.
By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.
Explanation of Solution
When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation
However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.
Want to see more full solutions like this?
Chapter 4 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- 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.…arrow_forwardFor each of the following independent cases (A through E), compute the missing values in the table: Total Manufacturing Cost Case A B CDE Prime Cost 6,880 11,680 Conversion Cost 11,570 8,050 20,670 Direct Materials $ 2,040 2,200 1,450 3,490 $ Direct Manufacturing Labor Overhead 1,100 S 3,070 2,020 3,520 6,890 3,000 9,500 5,970arrow_forwardFor each of the following independent cases (A through E), compute the missing values in the table: Total Manufacturing Cost Case A B C DE E Prime Cost 6,950 11,660 Conversion Cost 11,580 7,970 20,510 Direct Materials $ 2,010 $ 2,120 1,410 3,340 Direct Labor Manufacturing Overhead 1,020 $ 3,140 2,030 3,620 6,750 2,900 9,380 5,990arrow_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_forwardMahaley, Incorporated, manufactures and sells two products: Product Q9 and Product FO. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below: Product 09 Product Fe Total direct labor-hours Product Q9 Product Fe The direct labor rate is $22.50 per DLH. The direct materials cost per unit for each product is given below: Direct Materials Cost per Unit $ 175.60 $ 147.40 Activity Cost Pools Labor-related Expected Production 870 870 Machine setups Order size The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity: Estimated Overhead Cost Direct Labor- Hours Per Unit 8.7 6.7 Activity Measures DLHS setups MHS Total Direct Labor- Hours 7,569 5,829 13,398 $ 386,680 47,330 288, 200 $ 722,210 Expected Activity Product Q9 Product Fe 7,569 5,829 650 550 3,800 3,600 Total 13,398 1,200 7,400 The unit product cost…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_forward
- Rex 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_forwardThe 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_forwardOverhead costs are assigned to each product based on __________________. A. the proportion of that products use of the cost driver B. a predetermined overhead rate for a single cost driver C. price of the product D. machine hours per productarrow_forward
- Wrappers Tape makes two products: Simple and Removable. It estimates it will produce 369,991 units of Simple and 146,100 of Removable, and the overhead for each of its cost pools is as follows: It has also estimated the activities for each cost driver as follows: Â How much is the overhead allocated to each unit of Simple and Removable?arrow_forwardAdam Inc.s records for May include the following information: A. What are Adams standard labor hours for the units made? B. What is Adams total standard labor cost for the units made?arrow_forward0 Ellerie, Incorporated, manufactures and sells two products Product G8 and Product 00. Data concerning the expected production of each product and the expected total direct labor hours (DLH) required to produce that output appear below: Activity Cost Pools Labor-related Expected Hours Per Production Unit 710 5.1 310 2.1 Product CB Product 00 Total direct labor-hours The direct labor rate is $22.20 per DLH. The direct materials cost per unit for each product is given below Direct Materials Cost per Unit $114.10 $ 114.50 Machine setups Order sice Direct Labor- Product CB Product 00 The company is considering adopting an activity based costing system with the following activity cost pools, activity measures, and expected activity Estimated Overhead Multiple Choice Activity Measures Total Direct Labor- Hours 3,621 651 4,272 Cost $56,055 54,890 366,008 $ 476,953 Which of the following statements concerning the unit product cost of Product GB is true? (Round your intermediate calculations…arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College