June and Muskaan decide to start their own cellphone company after graduating. T
ID: 2481956 • Letter: J
Question
June and Muskaan decide to start their own cellphone company after graduating. Their accountants have identified the following three activities and related cost drivers for indirect production costs: Activity Cost Driver Materials Handling Direct-materials cost Engineering Engineering change notices Power Kilowatt hours There are 3 types of cellphones, Cool, Super-Cool, and Really Super-Cool. The direct costs and cost drivers are given below: Cool Super-Cool Really Super-Cool Direct materials Cost $ 25,000 $ 50,000 $ 125,000 Direct-labor cost $ 4,000 $ 1,000 $ 3,000 Kilowatt hours 50,000 200,000 150,000 Engineering change notices 13 5 2 Indirect production cost for the month was: Materials handling $ 8,000 Engineering $ 20,000 Power $ 16,000 Total indirect Production Cost $ 44,000 1. Compute the indirect production cost allocated to each product with the activity based costing system. 2. Suppose all indirect production costs had been allocated to products in proportion to their direct-labor costs. Compute the indirect production costs allocated to each product. 3. In which product costs, those in number 1 or those in number 2, do you have the most confidence? Why? June and Muskaan decide to start their own cellphone company after graduating. Their accountants have identified the following three activities and related cost drivers for indirect production costs: Activity Cost Driver Materials Handling Direct-materials cost Engineering Engineering change notices Power Kilowatt hours There are 3 types of cellphones, Cool, Super-Cool, and Really Super-Cool. The direct costs and cost drivers are given below: Cool Super-Cool Really Super-Cool Direct materials Cost $ 25,000 $ 50,000 $ 125,000 Direct-labor cost $ 4,000 $ 1,000 $ 3,000 Kilowatt hours 50,000 200,000 150,000 Engineering change notices 13 5 2 Indirect production cost for the month was: Materials handling $ 8,000 Engineering $ 20,000 Power $ 16,000 Total indirect Production Cost $ 44,000 1. Compute the indirect production cost allocated to each product with the activity based costing system. 2. Suppose all indirect production costs had been allocated to products in proportion to their direct-labor costs. Compute the indirect production costs allocated to each product. 3. In which product costs, those in number 1 or those in number 2, do you have the most confidence? Why?Explanation / Answer
1) Indirect Costs Total Ratio Cool Super-Cool Really Super-Cool Materials handling 8,000 2.5:5:12.5 1,000 2,000 5,000 Engineering 20,000 4:1:3 10,000 2,500 7,500 Power 16,000 5:20:15 2,000 8,000 6,000 Total 44,000 13,000 12,500 18,500 2) Indirect Costs Total Cool Super-Cool Really Super-Cool Materials handling 8,000 4:1:3 4,000 1,000 3,000 Engineering 20,000 4:1:3 10,000 2,500 7,500 Power 16,000 4:1:3 8,000 2,000 6,000 Total 44,000 22,000 5,500 16,500 3) I'm confident in method one. Because it allocate the indirect costs based on the proportion of particular direct costs. It will give more accuracy than the 2nd method