Single plantwide rate and activity-based costing Whirlpool Corporation conducted
ID: 2449218 • Letter: S
Question
Single plantwide rate and activity-based costing
Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators:
Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $600 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows:
a. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C).
If required, round all per unit answers to nearest cent. Round percents to one decimal place. For column C, use the minus sign to indicate a negative or decrease.
b. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method?
Three RepresentativeRefrigerators Number of
Machine Hours Number of
Setups Number of
Sales Orders Number of
Units Refrigerator—Low Volume 120 16 48 600 Refrigerator—Medium Volume 390 15 107 1,950 Refrigerator—High Volume 910 11 160 4,550
Explanation / Answer
Answer:
b)
The traditional overhead rate per machine hour is higher because it also accormodates overhead under other activities as single rate rather than multiple and separate rate under ABC.
A B C = A*$600 D = C/B Three Representative Number of Number of Total factory overhead Single Rate Refrigerators Machine Hours Units single machine hour basis Overhead Allocation Refrigerator—Low Volume 120 600 72000 120 Refrigerator—Medium Volume 390 1,950 234000 120 Refrigerator—High Volume 910 4,550 546000 120