Introduction To Managerial Accounting
8th Edition
ISBN: 9781259917066
Author: BREWER, Peter C., Garrison, Ray H., Noreen, Eric W.
Publisher: Mcgraw-hill Education,
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Question
Chapter 4, Problem 15P
1
To determine
Predetermined overhead rate
The allocation rate which is calculated to allocate overhead or indirect cost to various cost objects is called predetermined overhead rate.
Unit product cost
It is the total cost incurred to produce a single unit and it is obtained by the division of total cost incurred and total number of units manufactured.
To calculate: The predetermined overhead rate by using direct labor hours (DLHs) and unit product cost.
1
Expert Solution
Answer to Problem 15P
Predetermined overhead rate is $50 per DLH.
Unit product cost of flexible model is $240and unit product cost of regular model is $145.
Explanation of Solution
Predetermined overhead rate based on DLHs will be calculated as:
Here, total expected overhead cost is $6,00,000 and total direct labor hours will be calculated by using the following formula:
So, predetermined overhead rate will be:
Now, unit product cost will be calculated as follows:
| Particulars | Flexible model(in $) | Regular model(in $) |
| Direct material cost (per unit) | 110 | 80 |
| Direct labor cost (per unit) | 30 | 15 |
| Overhead cost (per unit) (Calculated below) | 100 | 50 |
| Total product cost (per unit) | 240 | 145 |
Overhead cost per unit will be calculated as:
For flexible model overhead cost (per unit) will be:
For regular model overhead cost (per unit) will be:
2
To determine
Activity based costing:
ABC is a system that identifies every task performed by the organization as an activity and then cost of every activity is assigned to all the products. Allocation of cost is done by creating a relationship among activity, costs and products.
Activity cost pool:
An activity cost pool represents the aggregate cost incurred by a company while performing one manufacturing process or task.
An activity rate for each activity cost pool.
2
Expert Solution
Answer to Problem 15P
Activity rate:
For purchase orders is $50 per order,
For rework requests is $50 per request,
For product testing is $100 per test and
For machine related activities is $90 per MH.
Explanation of Solution
Activity rates are calculated with the help of following formula:
So, activity rates will be calculated as follows:
| Activity cost pool | Activity measure | Expected value of overheads (X)(in $) | Total expected activity (Y) | Activity rate (X/Y)(in $) |
| Purchase orders | Orders | 20,000 | 400 | 50 per order |
| Rework requests | Requests | 10,000 | 200 | 50 per request |
| Product testing | Tests | 210,000 | 2,100 | 100 per test |
| Machine related | Machine hours (MHs) | 360,000 | 4,000 | 90 per MH |
Activity rate of purchase orders is $50 per order, for rework requests is $50 per request, product testing is $100 per test and machine related activities is $90 per MH.
3
To determine
Overhead cost allocation:
Overhead costs are the indirect costs (not directly related to products) which are incurred to support the general operations within an organization. Total overhead cost incurred is allocated to all the products using the correct measure.
Unit product cost
Unit product cost represents the total cost incurred for producing a single unit. Calculation for this cost is done by dividing total amount of cost by total number of units produced.
Total overhead cost that will be allocated to each product and cost of one unit.
3
Expert Solution
Answer to Problem 15P
Overhead cost allocated to flexible model is $233,000 and to rigid model is $367,000.
Unit product cost of flexible model is $373 and unit product cost of rigid model is $131.7.
Explanation of Solution
Under the ABC system, overhead costs are allocated to each product according to the consumption of each activity by every product. So firstly, consumption ratio for each activity will be calculated.
Calculation of ratio:
| Particulars | Flexible model | Rigid model | RatioFlexible: Rigid |
| Purchase orders | 100 | 300 | 1:3 |
| Rework requests | 60 | 140 | 6:14 or 3:7 |
| Product testing | 900 | 1,200 | 9:12 or 3:4 |
| Machine related | 1,500 | 2,500 | 15:25 or 3:5 |
Now, overhead costs will be allocated as follows:
| Activity cost pool | Overhead expense(in $) | Ratio | Flexible model(in $) | Rigid model (in $) |
| Purchase orders (orders) | 20,000 | 1:3 | 5,000 | 15,000 |
| Rework requests (requests) | 10,000 | 3:7 | 3,000 | 7,000 |
| Product testing (tests) | 210,000 | 3:4 | 90,000 | 120,000 |
| Machine related (machine hours) | 360,000 | 3:5 | 135,000 | 225,000 |
| Total overhead cost | 233,000 | 367,000 | ||
So, total overhead cost allocated to flexible model is $233,000 and to rigid model is $367,000.
Calculation for unit product cost will be done as follows:
| Particulars | Flexible model ($) | Rigid model ($) |
| Total direct material cost | $110* 1000 = 110,000 | $80 *10,000= 800,000 |
| Total direct labor cost | $30 *1000 = 30,000 | $15* 10,000 = 150,000 |
| Total overhead cost | 233,000 | 367,000 |
| Total product cost | 373,000 | 1,317,000 |
| Number of units | 1,000 | 10,000 |
| Unit product cost | 373.00 | 131.70 |
4
To determine
Traditional method
In this method, a single measure or base is used to distribute the total overhead cost to all the products.
ABC method
In ABC method, different measures or bases are used in the allocation process.
To explain: Why profit differs or decline when different methods are used.
4
Expert Solution
Explanation of Solution
Amount of profits differ in both the methods and generally, it is less when ABC system is used. This different occurs because cost allocation method in both the methods is different.
Conventional method uses a single or uniform measure to allocate the overhead cost to products and ABC method uses different measures to allocate the overhead costs. Different activity measures are applied for different cost pools. Because of different methods, overhead cost allocated to products differ in both the methods which leads to different profits.
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Chapter 4 Solutions
Introduction To Managerial Accounting
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