Chapter IE, Problem 6IE

To determine

To calculate: The Departmental overhead rates and amount of overhead assigned to each product and prepare the revised segmented income statement

Answer to Problem 6IE

Solution: The Departmental overhead rates and amount of overhead assigned to each product are as follows:

	Molding	Assemble and Pack
Departmental Overhead rate	$ 35.80	$ 18.75

	Basic	Advance	Total
Total Overhead assigned to products	$ 804,545	$ 545,455	$ 1,350,000

The revised segmented income statement is as follows:

Segmented Income Statement	Basic	Advance	Total
Number of Units Produced and Sold	20000	10000	30000
Sales	$ 3,000,000	$ 2,000,000	$ 5,000,000
Cost of Goods Sold using the Departmental overhead rate	$ 2,204,545	$ 1,445,455	$ 3,650,000
Gross Margin	$ 795,455	$ 554,545	$ 1,350,000
Selling and Administrative Expenses	$ 720,000	$ 480,000	$ 1,200,000
Net operating Income/ (Loss)	$ 75,455	$ 74,545	$ 150,000

Explanation of Solution

The Departmental overhead rates and amount of overhead assigned to each product are calculated as follows:

	Molding	Assemble and Pack
Manufacturing overhead Cost (A)	$ 787,500	$ 562,500
Allocation basis	Machine Hours	Direct Labor Hours
Allocation basis Quantity (B)	22,000	30,000
Departmental Overhead rate (A/B)	$ 35.80	$ 18.75

	Basic	Advance	Total
Machine Hours in Molding Deptt. (A)	12,000	10000
Molding Deptt. Overhead rate (B)	$ 35.80	$ 35.80
Molding Deptt. Overhead assigned (C) =A*B =	$ 429,545.45	$ 357,954.55	$ 787,500
Direct Labor Hours in Assemble and Pack deptt. (D)	20,000	10000
Assemble and Pack deptt. Overhead rate (E)	$ 18.75	$ 18.75
Assemble and Pack deptt. Overhead assigned (F) = D*E=	$ 375,000.00	$ 187,500.00	$ 562,500
Total Overhead assigned to products (C+F)	$ 804,545	$ 545,455	$ 1,350,000

The revised segmented income statement is prepared as follows:

Segmented Income Statement	Basic	Advance	Total
Number of Units Produced and Sold	20000	10000	30000
Sales (A)	$ 3,000,000	$ 2,000,000	$ 5,000,000
Cost of Goods Sold using the Plan wide overhead rate	$ 2,300,000	$ 1,350,000	$ 3,650,000
Less: Overhead assigned using the Plant wide overhead rate	$ (900,000)	$ (450,000)	$(1,350,000)
Add: Overhead assigned using the Departmental overhead rate	$ 804,545	$ 545,455	$ 1,350,000
Cost of Goods Sold using the Departmental overhead rate (B)	$ 2,204,545	$ 1,445,455	$ 3,650,000
Gross Margin (C) =A-B =	$ 795,455	$ 554,545	$ 1,350,000
Selling and Administrative Expenses (D)	$ 720,000	$ 480,000	$ 1,200,000
Net operating Income/ (Loss) (C-D)	$ 75,455	$ 74,545	$ 150,000

Requirement-3:

To determine

To calculate: The activity rates and allocated overhead cost and selling and administrative costs for each product

Answer to Problem 6IE

Solution: The activity rates and allocated overhead cost and selling and administrative costs for each product are as follows:

Activity Cost Pool	Activity Measure	Allocation Rate
		B/A
Machining	Machine hours in Molding	$ 18.98
Assemble and pack	Direct Labor hours in Assemble and Pack	$ 9.42
Order Processing	Number of Customer orders	$ 511.11
Setups	Setup hours	$ 618.18
Total

Allocation of Overhead:
	Basic	Advance	Total
Allocated Overhead	$ 867,777.78	$ 402,222.22	$ 1,270,0000

Selling and Administrative Cost:
	Basic	Advance	Total
Sales Commission	$ 150,000	$ 200,000	$ 350,000
Traceable Fixed Advertising costs	$ 150,000	$ 200,000	$ 350,000
Balance Selling and Administrative Cost			$ 500,000

Explanation of Solution

The activity rates and allocated overhead cost and selling and administrative costs for each product are calculated as follows:

Activity Cost Pool	Activity Measure	Activity Quantity	Manufacturing Overhead	Allocation Rate
		A	B	B/A
Machining	Machine hours in Molding	22000	$ 417,500	$ 18.98
Assemble and pack	Direct Labor hours in Assemble and Pack	30000	$ 282,500	$ 9.42
Order Processing	Number of Customer orders	450	$ 230,000	$ 511.11
Setups	Setup hours	550	$ 340,000	$ 618.18
Other	Number of units	30000	$ 80,000	$ 2.67
Total			$ 1,350,000

Allocation of Overhead:
Basic Model:
Activity Cost Pool	Activity Measure	Activity Quantity	Allocation Rate	Allocated Overhead
		A	B	=A*B
Machining	Machine hours in Molding	12000	$ 18.98	$ 227,727.27
Assemble and pack	Direct Labor hours in Assemble and Pack	20000	$ 9.42	$ 188,333.33
Order Processing	Number of Customer orders	400	$ 511.11	$ 204,444.44
Setups	Setup hours	400	$ 618.18	$ 247,272.73
Total				$ 867,777.78
Advanced Model:
Activity Cost Pool	Activity Measure	Activity Quantity	Allocation Rate	Allocated Overhead
		A	B	=A*B
Machining	Machine hours in Molding	10000	$ 18.98	$ 189,772.73
Assemble and pack	Direct Labor hours in Assemble and Pack	10000	$ 9.42	$ 94,166.67
Order Processing	Number of Customer orders	50	$ 511.11	$ 25,555.56
Setups	Setup hours	150	$ 618.18	$ 92,727.27
Total				$ 402,222.22

Selling and Administrative Cost:
	Basic	Advance	Total
Sales (A)	$ 3,000,000	$ 2,000,000	$ 5,000,000
Sales Commission (B) = A*5% and A*10%	$ 150,000	$ 200,000	$ 350,000
Traceable Fixed Advertising costs (C)	$ 150,000	$ 200,000	$ 350,000
Balance Selling and Administrative Cost (D) =(1200000-B-C)			$ 500,000

Requirement-4:

To determine

To prepare: The Contribution format segment income statement

Answer to Problem 6IE

Solution: The Contribution format segment income statement is as follows:

Contribution Format Segmented Income Statement
	Basic	Advance	Total
Sales	$ 3,000,000	$ 2,000,000	$ 5,000,000
Variable Expenses:
Variable Cost of Goods Sold	$ 1,400,000	$ 900,000	$ 2,300,000
Sales Commission	$ 150,000	$ 200,000	$ 350,000
Total Variable Expenses	$ 1,550,000	$ 1,100,000	$ 2,650,000
Segment Contribution Margin	$ 1,450,000	$ 900,000	$ 2,350,000
Traced Fixed Expenses:
Overhead assigned using the Activity based Costing	$ 867,778	$ 402,222	$ 1,270,000
Traceable Fixed Selling and Administrative Expenses	$ 150,000	$ 200,000	$ 350,000
Total Traced Fixed Expenses	$ 1,017,778	$ 602,222	$ 1,620,000
Segment Income	$ 432,222	$ 297,778	$ 730,000
Common Fixed Expenses:
Other overheads (unused capacity)			$ 80,000
Common Fixed Selling and Administrative Expenses			$ 500,000
Total Common Fixed Expenses			$ 580,000
Net operating Income/ (Loss)			$ 150,000

Explanation of Solution

The Contribution format segment income statement is prepared as follows:

Contribution Format Segmented Income Statement
	Basic	Advance	Total
Sales (A)	$ 3,000,000	$ 2,000,000	$ 5,000,000
Variable Expenses:
Cost of Goods Sold using the Plan wide overhead rate	$ 2,300,000	$ 1,350,000	$ 3,650,000
Less: Overhead assigned using the Plant wide overhead rate	$ (900,000)	$ (450,000)	$(1,350,000)
Variable Cost of Goods Sold (B)	$ 1,400,000	$ 900,000	$ 2,300,000
Sales Commission (C)	$ 150,000	$ 200,000	$ 350,000
Total Variable Expenses (D) = B+C =	$ 1,550,000	$ 1,100,000	$ 2,650,000
Segment Contribution Margin (E) =A-D =	$ 1,450,000	$ 900,000	$ 2,350,000
Traced Fixed Expenses:
Overhead assigned using the Activity based Costing	$ 867,778	$ 402,222	$ 1,270,000
Traceable Fixed Selling and Administrative Expenses	$ 150,000	$ 200,000	$ 350,000
Total Traced Fixed Expenses (F)	$ 1,017,778	$ 602,222	$ 1,620,000
Segment Income (G) = E-F=	$ 432,222	$ 297,778	$ 730,000
Common Fixed Expenses:
Other overheads (unused capacity)			$ 80,000
Common Fixed Selling and Administrative Expenses			$ 500,000
Total Common Fixed Expenses (H)			$ 580,000
Net operating Income/ (Loss) (G-H)			$ 150,000

Requirement-5:

To determine

To calculate: The breakeven point in dollars for Advanced Model

Answer to Problem 6IE

Solution: The breakeven point in dollars for Advanced Model is $ 1,338,272

Explanation of Solution

The breakeven point in dollars for Advanced Model is calculated as follows;

Breakeven Point ($) for Advanced Model:
Total Traced Fixed Expenses (A)	$ 602,222
Contribution Margin (B)	$ 900,000
Sales (C)	$ 2,000,000
Contribution Margin % (D) = B/C	45.00%
Breakeven Point ($) = A/D =	$ 1,338,272

Requirement-6:

To determine

To show: The difference between the activities based costing and plant wide and Departmental approach

Answer to Problem 6IE

Solution: ABC costing method does not use the plant wide overhead rate like plant wide and Departmental approach, rather it uses different allocation rate for different production activity.

Explanation of Solution

In case of the plant wide and Departmental approaches, the manufacturing overhead costs are allocated to the products using a single overhead allocation rate.

Activity based costing (ABC) costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike plant wide and Departmental approaches, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.

Conclusion

Hence, ABC costing method uses different allocation rate for different production activity.