Simplifying the ABC System DBC Electan Company produces two

Simplifying the ABC System: DBC

Electan Company produces two types of printers. The company uses ABC, and all activity drivers are duration drivers. Electan Company is considering using DBC and has gathered the following data to help with its decision.

A. Activities with duration drivers:

               Activities             

Products              Changeover        Assembly Testing Rework Total Hours

Printer A              1,000                   12,000 8,000 8,000 25,000     

Printer B              4,000                   8,000 12,000 12,000 25,000     

Total hours         5,000                   20,000 20,000 20,000 50,000     

B. Activities with consumption ratios and costs:

               Activities             

Products              Changeover        Assembly Testing Rework Cost

Assignment

Printer A              0.20                      0.60 0.40 0.80 $155,000   

Printer B              0.80                      0.40 0.60 0.20 $155,000   

Activity costs      $75,000               $120,000 $60,000 $55,000 $310,000   

C. Products with cycle time and practical capacity:

Products              Cycle Time          Practical Capacity

Printer A              2.5 hours            10,000 units    

Printer B              1.25 hours          20,000 units    

Required:

1. Calculate the total time for all primary activities.

_____ hours

2. Calculate the overhead rate that DBC uses to assign costs.

$____ per labor hour

3. Use the overhead rate calculated in Requirement 2 to calculate the overhead cost per unit for each product.

Printer A              $____

Printer B              $____

Calculate the total overhead assigned to each product.

Printer A              $____

Printer B              $____

4. What if the units actually produced were 10,000 for Printer A and 18,000 for Printer B. Using DBC, calculate the cost of unused capacity.

$____

Solution

1. Total Time required:

Printer1 = 2.5 Hours x 10,000 Units = 25,000 Hours

Printer2 = 1.25 Hours X 20,000 Units = 25,000 Hours

Hence, Total Time Required = 25,000 +25,000 = 50,000 Hours

2. Overhead Rate = Total Over Head Cost / Total Hours

=   310,000/50,000

=   $6.20 per Hour

3. Overhead Cost per Unit = Cost per Hour X Cycle Time

Printer1 = $6.20 X 2.5 = $ 15.50

Printer2 = $6.20 X 1.25 = $ 7.75

Total overhead assigned to each product = Cost per Unit X Number of Units

Printer1 = $15.50 X 10,000 = $155,000

Printer2 = $7.75 X 20,000 = $ 155,000

4. Cost of unused capacity = Cost per unit X (Actual Capacity – Production)

= 7.75 X (20,000 – 18,000)

= 7.75 X 2,000

=$15,500