Contrasting ABC And Conventional Product Costs
Contrasting ABC And Conventional Product Costs Lo2 Lo3
Problem 3 12a Contrasting Abc And Conventional Product Costs Lo2 Lo3
Problem 3-12A Contrasting ABC and Conventional Product Costs [LO2, LO3, LO4] Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: EX300 TX500 Total
- Direct materials $366,325 $162,550 $528,875
- Direct labor $120,000 $42,500 $162,500
The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below:
- Machining (machine-hours): $198,500
- Setups (setup hours): $150,000
- Product-level (number of products): $100
- General factory (direct labor dollars): $60,125
Total manufacturing overhead cost: $508,625
Required: 1-a. Compute the plantwide overhead rate that would be used in the company’s conventional cost system. Round your answer to 2 decimal places.
Solution:
The plantwide overhead rate is calculated by dividing total manufacturing overhead by total direct labor costs:
Overhead Rate = Total Manufacturing Overhead / Total Direct Labor Dollars
Overhead Rate = $508,625 / $162,500 ≈ $3.13 per dollar of direct labor
1-b. Using the plantwide rate, compute the unit product cost for each product. Round to 2 decimal places.
EX300:
- Direct materials: $366,325 / 60,000 units = $6.11 per unit
- Direct labor: $120,000 / 60,000 units = $2.00 per unit
- Overhead: $3.13 × (Direct labor dollars per unit: $2.00) ≈ $6.26 per unit
- Unit product cost: $6.11 + $2.00 + $6.26 = $14.37
TX500:
- Direct materials: $162,550 / 12,500 units = $13.00 per unit
- Direct labor: $42,500 / 12,500 units = $3.40 per unit
- Overhead: $3.13 × $3.40 ≈ $10.64 per unit
- Unit product cost: $13.00 + $3.40 + $10.64 = $27.04
2-a. Compute the activity rate for each activity cost pool. Round to 2 decimal places.
Solution:
- Machining: $198,500 / total machine-hours
- Setups: $150,000 / total setup hours
- Product-level: $100 / number of products
- General factory: $60,125 / total direct labor dollars
However, since total machine-hours and setup hours are not provided directly, further data would be needed for precise calculations. For demonstration, assume total machine-hours and setup hours are known or estimated accordingly.
Using the activity rates, compute the unit product cost for each product. (Round answers to 2 decimal places.)
Note:
Once activity rates are determined, assign overhead costs to each product based on their activity consumption, then compute unit costs by dividing total assigned costs by the units produced.
Exercise 3-7 Contrast ABC and Conventional Product Costs [LO2, LO3, LO4]
Kunkel Company makes two products and uses a conventional costing system based on direct labor-hours. Data for the upcoming year:
- Manufacturing overhead costs: $336,000
- Product details:
- Mercon: direct material $10.00, direct labor $3.00, labor-hours per unit 0.25, production units 10,000
- Wurcon: direct material $8.00, direct labor $3.75, labor-hours per unit (not specified)
Required: 1. Calculate unit product costs for each using the conventional system.
Solution:
- Total direct labor-hours for each product: Mercon: 10,000 × 0.25 = 2,500 hours; Wurcon: 10,000 × 0.75 (assuming) = 7,500 hours
- Total labor-hours = 10,000 × 0.25 + 10,000 × 0.75 = 10,000 hours
- Overhead rate: $336,000 / 10,000 hours = $33.60 per labor-hour
- Mercon overhead: 2,500 × $33.60 = $84,000
- Wurcon overhead: 7,500 × $33.60 = $252,000
- Unit costs:
Mercon: Direct materials $10.00 + Direct labor $3.00 + Overhead ($84,000 / 10,000 units) = $10.00 + $3.00 + $8.40 = $21.40
Wurcon: Direct materials $8.00 + Direct labor $3.75 + Overhead ($252,000 / 10,000 units) = $8.00 + $3.75 + $25.20 = $36.95
2. Compute unit costs using the proposed ABC system, allocating half overhead on direct labor-hours and half on engineering design time.
Given total engineering design time of 4,000 hours, assume distribution between products accordingly. Then assign overhead based on these activity rates, and compute unit costs similarly as above.
Exercise 3-3 Compute ABC Product Costs [LO3]
Larner Corporation has activity cost pools and rates:
- Labor-related: $7.00 per direct labor-hour
- Machine-related: $3.00 per machine-hour
- Machine setups: $40.00 per setup
- Production orders: $160.00 per order
- Shipments: $120.00 per shipment
- General factory: $4.00 per direct labor-hour
Products: J78 and B52, with data:
- Direct materials cost per unit: $6.50 (J78), $31.00 (B52)
- Direct labor cost per unit: $3.75 (J78), $6.00 (B52)
- Production quantities: 4 units of J78 (assumed total expected activity)
Required: Compute the unit product costs for each product.
Solution:
For each product, multiply activity consumption by activity rates, sum the costs, and divide by units produced to find unit product costs.
Question about IQ scores and probabilities
If IQ scores are normally distributed with a standard deviation of 10 and mean of 100, find the probability that the sample mean of 130 IQ scores will not differ from the population mean by more than 2 points.
Similarly, for fish length data, calculate the probability that the mean length of 58 fish is within 0.5 inch of 15 inches.