Billy Corp allocated the following amounts of manufacturing

Billy Corp allocated the following amounts of manufacturing overhead to Products A & B using only direct labor hours as a driver:

Product A 168,000

Product B 112,000

Billy has decided to switch to ABC for the allocation of manufacturing overhead. Billy will still use direct labor hours as a driver for $120,000 of overhead. The remaining overhead will be allocated using machine hours. Product A uses 2,000 machine hours and Product B uses 6,000 machine hours.

a) How much additional overhead is allocated to Product B after switching to ABC?

b) Refer to above. How much overhead is allocated to Product A in the machine hours pool?

c)Tammy Corp has the following data:

Variable Cost/Unit = $48

Variable Cost % = 80%

Fixed Cost = $96,000

Tax Rate = 30%

How many units must Tammy sell to make an after-tax profit = $40,320?

d) Refer to above. What is the total variable cost when Tammy makes an after-tax profit = $117,600?

Solution

Solution-

Part a. - additional overhead allocated to product B under ABC costing method

Total Overhead = ($168000 + $112000) = $280000

Overhead to be allocated as per direct labour hour = $120000

Overhead to be allocated as per machine Hours = $160000

Total Machine Hours = (2000 + 6000) = 8000 hours

Predetermined Overhead rate =

(Estimated overhead)/Estimated Allocation base i.e. Machine Hours

Predetermined overhead rate = ($160000/8000) = $20 Per machine Hours

Overhead Allocation to Product B under ABC costing

Overhead allocated (Direct labour hours)

($112000/$280000)*$120000

Overhead allocated (Machine Hours)

($20 per machine hour * 6000 machine hours

Additional Overhead allocated to product B under ABC system

Part b. Overhead allocated to Product A under machine hour pool

Formula = Predetermined Overhead rate * Total Machine of product A

Overhead allocated to product A =

($20 Per machine hour * 2000 machine hour) = $40000

Part c. Calculation of units to be sold to make after tax profit of $40320

We take reversal approach to solve the question

Net Income (After Tax) (70%)

(Since tax is 30%)

Add : Tax expenses (30%)

($40320/70)*30

Contribution Margin (20%) (A)

(since variable cost part is 80%)

Total Units to be sold = Total Sales/Sales price per unit

Total Units to be sold = ($768000/$48) = 16000 unite

Part d. Total Variable cost when after tax profit is $117600

After Tax Profit (70%)

(since Tax is 30%)

Add : taxes expenses (30%)

($117600/70)*30

Contribution Margin (20%)

(Since variable cost part is 80%)

Variable cost (80%)

($264000/20)*80

Particulars	Amount
Overhead allocated (Direct labour hours) ($112000/$280000)*$120000	$48000
Overhead allocated (Machine Hours) ($20 per machine hour * 6000 machine hours	$120000
Total Overhead Allocated	$168000