Memory Disk Inc. is considering a change to activity-based product costing. The
ID: 2484819 • Letter: M
Question
Memory Disk Inc. is considering a change to activity-based product costing. The company produces two products, CDs and DVDs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $547,200.
Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.
The following information about CDs and DVDs was determined from the corporate records:
If required, round your answers to the nearest cent.
a. Determine the indirect labor cost per unit allocated to CDs and DVDs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.
b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.
c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.
Number ofSetups Direct Labor
Hours Units CDs 500 2,000 76,000 DVDs 1,100 2,000 76,000 Total 1,600 4,000 152,000
Explanation / Answer
a) Overhead rate = Idirect labor cost /number of DLH
= 547200 / 4000 = $ 136.8 PER DLH
CD =overhead allocated /number of units
= (136.8* 2000) / 76000
= 273600/76000 = $ 3.6 per unit
DVD = (136.8*2000)/ 76000 = $ 3.6 per unit
b) set up - 547200*.40 =218880 / 1600 = $ 136.8 per set up
Production - 547200*.60 = 328320/4000 = $ 82.08 per DLH
c) CD = (allocated set up cost + allocated production cost) Number of units
= [(136.8* 500)+(82.08* 2000)/ 76000
= [68400+ 164160]/76000
= 232560/76000
= $ 3.06 per unit
DVD =[(1100* 136.8)+(2000*82.08) ]/76000
= [150480+ 164160]/76000
= $ 4.14 per unit