APS, Inc., manufactures two products, Regular and Deluxe, and applies overhead o
ID: 2332557 • Letter: A
Question
APS, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead cost and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively.
Information about the company's products follows.
The overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000).
These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.
A. How much overhead cost would be applied to a unit of Regular and Deluxe products, respectively, if the company used traditional costing and applied all overhead cost solely on the basis of direct labor hours?
B. What would be the total cost (material + labor + OH applied) per unit of each product under traditional costing?
C. You, a recent graduate of School of Business, have joined the company. In your accounting class, you had learned a new concept called Activity-Based Costing, and you know that the use of the ABC technique might help the company calculate the product cost more accurately. So you convince the owner of the company to allow you to use ABC.
As the first step, compute the cost pool rates (i.e., overhead rates) that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
As per the procedures of activity-based costing, allocate each activity's cost to the two products.
a. Compute the per-unit overhead cost to be allocated to each unit of Regular and Deluxe.
b. Compute the per-unit total manufacturing cost of Regular and Deluxe.
c. What will you report to the owner of the company...what is your conclusion?
Regular—Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per hour Deluxe—
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour
Explanation / Answer
(A) Traditional Costing :-
Predetermined O/H rate = $1600000 / 25000 hrs = $64 per hr
Applied to Regular Product = $64 * 3hr = $192
Applied to Deluxe Product = $64 * 4hrs = $256
(B)
Regular
Deluxe
DM cost
28
42
DL cost
45
60
O/H cost
192
256
Total cost per unit
265
358
(C) (a) ABC costing :-
Regular
Deluxe
Order Processing
250000 * 320/500
=160000
90000
Machine Processing
1200000 * 16000/40000
=480000
720000
Product Inspection
150000 * 4000/10000
=60000
90000
Total O/H Cost (A)
700000
900000
Units Produced (B)
3000
4000
O/H Cost Per unit (A/B)
233.33
225
(C) (b)
Regular
Deluxe
DM cost
28
42
DL cost
45
60
O/H cost
233.33
225
Total cost per unit
306.33
327
Regular
Deluxe
DM cost
28
42
DL cost
45
60
O/H cost
192
256
Total cost per unit
265
358