Exercise 58A Allocating costs with different cost drivers LO

Exercise 5-8A Allocating costs with different cost drivers LO 5-1, 5-2, 5-3 Vaulker Company produces commercial gardening equipment. Since production is highly automated, the company allocates its overhead costs to product lines using activity-based costing The costs and cost drivers associated with the four overhead activity cost pools follow Activities Facility L evel Product Level 5 20,880 Percentage of use it Level Cost Cost driver 5 188,000 1,500 labor hes. Batch Level $40,000 40 setups $240,000 12,000 units Production of 800 sets of cutting shears, one of the company\'s 20 products, took 200 labor hours and 6 setups and consumed 15 percent of the product-sustaining activitios Required a. Had the company used labor hours as a companywide allocation base, how much overhead would it have allocated to the cutting shears? b. How much overhead is allocated to the cutting shears using activity based costing? c. Compute the overhead cost per unit for cutting shears first using activity-based costing and then using direct labor hours for allocation if 800 units are produced. If direct product costs are $240 and the product is priced at 30 percent above cost for what price would the product sell under each allocation system?

Solution

a

Total Overheads

Unit level

$ 180,000.00

Batch level

$    40,000.00

product level

$    20,000.00

Facility level

$ 240,000.00

Total Overheads Cost

$ 480,000.00

Total Labor hours

1500

Overhead rate per labor Hour

$          320.00

Allocation to Cutting Shears

Labor hours

200

Overhead rate per labor Hour

$          320.00

Overhead Allocated

$    64,000.00

b

Predetermined overhead rate as per activity based costing

Activity

Activity amount

Allocation basis

Total Activity Pool

Predetermined Overhead rate per Activity

Unit level

$ 180,000.00

Labor hours

1500

$     120.00

per Labor hour

Batch level

$    40,000.00

Setups

40

$ 1,000.00

per setup

product level

$    20,000.00

Percentage of use

100%

$     200.00

per %

Facility level

$ 240,000.00

no of units

12000

$        20.00

per unit

Cost Allocation to Cutting Shears

Activity

Activity level

rate per Activity

Overhead allocated

Unit level

200

$     120.00

$ 24,000.00

Batch level

6

$ 1,000.00

$    6,000.00

product level

15%

$     200.00

$    3,000.00

Facility level

800

$        20.00

$ 16,000.00

Total Overheads Allocated

$ 49,000.00

c

Overhead cost as per ABC

$    49,000.00

Units Produced

800

Overhead per Unit

$            61.25

Overhead cost using direct labor Hour

$    64,000.00

Units Produced

800

Overhead per Unit

$            80.00

ABC Basis

Direct labor Basis

Product Cost per Unit

$          240.00

$     240.00

Overhead Per Unit

$            61.25

$        80.00

Total Cost

$          301.25

$     320.00

Price (Cost*130%)

$          391.63

$     416.00

a	Total Overheads
	Unit level	$ 180,000.00
	Batch level	$    40,000.00
	product level	$    20,000.00
	Facility level	$ 240,000.00
	Total Overheads Cost	$ 480,000.00
	Total Labor hours	1500
	Overhead rate per labor Hour	$          320.00