Please help and ease include solution. Tia 3. How might Sander\'s managers use t
ID: 2329988 • Letter: P
Question
Please help and ease include solution. Tia
3. How might Sander's managers use the new cost information from its activity OST per u or each prood better manage its business? based Department costing, service company. DLN is an architectural m00. DLN'S s ices each job on a cost plus 20% basis. Overhead costs in 2017 are that designs and builds build- $8,100,000. DLN's simple cost- I f ing system allocates overhead costs to its jobs based on number of jobs. There w customer, Chandler, has complained that the cost and price of its building in As a result, the controller has initiated a detailed review of the overhead allocatio were three jobs in 2017. One Chicago was not compe 2017 costs should be charged to jobs in proportion to consumption of overhead resour the following information: to determine if overhead by jobs. She gathers Quantity of Cost Drivers Used by Each Project DepartmentCost Driver Design Engineering Overhead Manle Design department hours Number of engineering hours Costs in 2017 Chandler Henry 10,000 4,000 27,000 2,000 4,000 29,000 8,000 4,500 26,000 $3,000,000 1,000,000 4,100,000 $8,100,000 ConstructionLabor-hours 1. Compute the overhead allocated to each project overhead costs to jobs based on the number of jobs. t in 2017 using the simple costing system that allocates 2. Compute the overhead allocated to each project in 201 3. Do 7 using department overhead cost rates you think Chandler had a valid reason for dissatisfaction with the cost and price of its building? How does the allocation based on department rates change costs for each project? 4. What value, if any, would DLN get by allocating costs of each department based on the activities done in that department? ns a small printing press thatExplanation / Answer
Answer:
1.Compute the overhead allocated to each project in 2017 using the simple costing system that allocates overhead costs to jobs based on the number of jobs.
Overhead cost per project in 2017
=8,100,000 /3
=$2,700,000 per project
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2.Compute the overhead allocated to each project in 2017 using department overhead cost rates.
Rates per unit cost driver
Activity
Cost Driver
Rate
Design
Design department hours
3000000÷ (2,000 + 10,000 + 8,000)
= $150 per design-hour
Engineering
Engineering dept. hours
1000000 ÷ (4,000 + 4,000 + 4,500)
= $80 per engineering-hour
Construction
Labor-hours
4100000÷ (29,000 + 27,000 + 26,000)
= $50 per labor-hour
Overhead cost allocated to each project using department overhead cost rates:
Chandler
Henry
Manley
Design: $150 × 2,000; 10,000; 8,000
300000
1500000
1200000
Engineering: $80 × 4,000; 4,000; 4,500
320000
320000
360000
Construction: $50 × 29,000; 27,000; 26,000
1450000
1350000
1300000
Total overhead costs
2070000
3170000
2860000
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3
Chandler
Henry
Manley
a. Department rates
(Requirement 2)
$2,070,000
$3,170,000
$2,860,000
b. Plantwide rate
(Requirement 1)
$2,700,000
$2,700,000
$2,700,000
Ratio of (a) ÷ (b)
0.77
1.17
1.06
As we can see from the above table that overhead allocated to Chandler decreases by 23% under the department rates and on the other hand overhead allocated to Henry increases by about 17%, and the overhead allocated to Manley increases by about 6%.
Reason behind this is three projects differ sizably in the way they use the resources of the three departments.
The percentage of total driver units in each department used by the companies is:
Cost
Department
Driver
Chandler
Henry
Manley
Design
Design-hours
10%
50%
40%
Engineering
Engineering-hours
32
32
36
Construction
Labor-hours
35
33
32
As we can see from the above table that Chandler project uses only 10% of design-hours in 2017 and uses 32% of engineering-hours and 35% of construction hours. The result is that the overhead rate, based on allocating costs equally to all projects (33%), will greatly overestimate the cost of resources used on the Chandler project, which uses very few design-hours. This explains the 23% decrease in indirect costs assigned to the Chandler project when department rates are used.
In contrast, the Henry and Manley projects use more of design (50% and 40%, respectively). Hence, the use of department rates will report higher indirect costs for Henry and Manley than does a single overhead rate.
.
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4
It would not be worthwhile to further refine the cost system into an ABC system if
(1) a single activity accounts for a sizable proportion of the department’s costs or
(2) significant costs are incurred on different activities within a department, but each activity has the same cost driver or
(3) there wasn’t much variation among contracts in the consumption of activities within a department.
If, for example, most activities within the design department were, in fact, driven by design-hours, then the more refined system would be more costly and no more accurate than the department-based cost system. If, however, the overhead costs in the construction and design departments (which have the majority of overhead costs) had activities that would cause different projects to use the resources of that department differently, then DLN should consider allocating costs of the department based on activities within those departments.
Activity
Cost Driver
Rate
Design
Design department hours
3000000÷ (2,000 + 10,000 + 8,000)
= $150 per design-hour
Engineering
Engineering dept. hours
1000000 ÷ (4,000 + 4,000 + 4,500)
= $80 per engineering-hour
Construction
Labor-hours
4100000÷ (29,000 + 27,000 + 26,000)
= $50 per labor-hour