Exercise 5-8A Allocating costs with different cost drivers LO 5-1, 5-2, 5-3 Vaul
ID: 2401103 • Letter: E
Question
Exercise 5-8A Allocating costs with different cost drivers LO 5-1, 5-2, 5-3 Vaulker Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing The costs and cost drivers associated with the four overhead activity cost pools follow Activities Facility L evel Product Level 5 20,880 Percentage of use it Level Cost Cost driver 5 188,000 1,500 labor hes. Batch Level $40,000 40 setups $240,000 12,000 units Production of 800 sets of cutting shears, one of the company's 20 products, took 200 labor hours and 6 setups and consumed 15 percent of the product-sustaining activitios Required a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the cutting shears? b. How much overhead is allocated to the cutting shears using activity based costing? c. Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 800 units are produced. If direct product costs are $240 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system?Explanation / Answer
a
Total Overheads
Unit level
$ 180,000.00
Batch level
$ 40,000.00
product level
$ 20,000.00
Facility level
$ 240,000.00
Total Overheads Cost
$ 480,000.00
Total Labor hours
1500
Overhead rate per labor Hour
$ 320.00
Allocation to Cutting Shears
Labor hours
200
Overhead rate per labor Hour
$ 320.00
Overhead Allocated
$ 64,000.00
b
Predetermined overhead rate as per activity based costing
Activity
Activity amount
Allocation basis
Total Activity Pool
Predetermined Overhead rate per Activity
Unit level
$ 180,000.00
Labor hours
1500
$ 120.00
per Labor hour
Batch level
$ 40,000.00
Setups
40
$ 1,000.00
per setup
product level
$ 20,000.00
Percentage of use
100%
$ 200.00
per %
Facility level
$ 240,000.00
no of units
12000
$ 20.00
per unit
Cost Allocation to Cutting Shears
Activity
Activity level
rate per Activity
Overhead allocated
Unit level
200
$ 120.00
$ 24,000.00
Batch level
6
$ 1,000.00
$ 6,000.00
product level
15%
$ 200.00
$ 3,000.00
Facility level
800
$ 20.00
$ 16,000.00
Total Overheads Allocated
$ 49,000.00
c
Overhead cost as per ABC
$ 49,000.00
Units Produced
800
Overhead per Unit
$ 61.25
Overhead cost using direct labor Hour
$ 64,000.00
Units Produced
800
Overhead per Unit
$ 80.00
ABC Basis
Direct labor Basis
Product Cost per Unit
$ 240.00
$ 240.00
Overhead Per Unit
$ 61.25
$ 80.00
Total Cost
$ 301.25
$ 320.00
Price (Cost*130%)
$ 391.63
$ 416.00
a
Total Overheads
Unit level
$ 180,000.00
Batch level
$ 40,000.00
product level
$ 20,000.00
Facility level
$ 240,000.00
Total Overheads Cost
$ 480,000.00
Total Labor hours
1500
Overhead rate per labor Hour
$ 320.00