Claire Company produces Tablets and Books. Total overhead costs traditionally ha
ID: 2416171 • Letter: C
Question
Claire Company produces Tablets and Books. Total overhead costs traditionally have been allocated on the basis of direct labor hours. After implementing activity-based costing, managers determined the following cost pools and cost drivers. They also decided that general costs should no longer be allocated to products. Activity Pool Department Costs Cost Driver Binding $255,816 Number of units Printing 831,402 Machine hours Product design 193,116 Change orders General 619,894 None Total overhead costs $1,900,228 Other information is as follows: Tablets Books Units 62,600 20,100 Direct materials cost per unit $3.11 $10.44 Direct labor cost per unit $4.17 $7.85 Direct labor hours 25,300 16,500 Machine hours 126,000 122,000 Change orders 1,400 2,900 Calculate predetermined OH rate. (Round answer to 2 decimal places, e.g. 15.25.) Determine the unit product cost for Tablets and Books using the traditional costing system. (Round overhead rate and final answers to 2 decmial places, e.g. 15.25.) Calculate ABC rates. (Round answers to 2 decimal places, e.g. 15.25.) Determine the unit product cost for Tablets and Books using the activity-based costing system. (Round all rates and final answers to 2 decmial places, e.g. 15.25.) Show that General cost is the difference between the total overhead costs allocated to products under the traditional system and the total cost allocated to products under the activity-based costing system. (Round answers to 0 decmial places, e.g. 1,525.)
Explanation / Answer
Costing is used in business accounting strategies as a way of determining the cost of manufacturing a product in relation to the revenue generated by that product. Costing systems determine the overhead of production and then allocate those overhead costs to a business’ products.
There are two common methods for allocating these indirect costs to products. Both of these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours.
The first of these methods is activity-based costing, which is sometimes referred to as "ABC." Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.
The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours.
Calculating the predetermined OH rate by using traditional costing method:
overhead recovery rate = overhead cost / direct labor hours
=1,900,228 /41,800 = 7.9
unit product cost for Tablets and Books by using traditional costing method:
Calculating the predetermined OH rate by using activity-based costing system:
Overhead cost per unit:
here tha balance over head i.e, the general overhead, company decided that general costs should no longer be allocated to products.
unit product cost for Tablets and Books by using activity-based costing system:
50.21
Particulars Table Books Material cost per unit 3.11 10.44 Direct labour cost per unit 4.17 7.85 Over head cost (7.9 * 4.11 for table and 7.9 * 7.85 for books) 32.94 62.02 Total production cost per unit 40.22 80.49