Digital Storage Concept Inc is considering a change to activ

Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 3,750 direct labor hours. The total indirect labor is budgeted to be $375,000.

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 cell phones and tablet PCs was determined from the corporate records:

Solution

Solution a:

Total indirect labor cost = $375,000

Total direct labor hours = 3750 hours

Single plantwide factory overhead rate = $375,000 / 3750 = $100 per hour

Indirect labor cost allocated to Cell phones = 1875 * $100 = $187,500

Indirect labor cost allocated to Tablet PCs = 1875 * $100 = $187,500

Indirect labor cost per unit allocated to cell phones = $187,500 / 93750 = $2

Indirect labor cost per unit allocated to Tablet PC = $187,500 / 93750 = $2

Solution b:

Solution c:

Solution d:

Per unit allocated cost in (a) is different from per unit activity cost assigned in product c because under part a overhead was allocated on the basis of single plant wide overhead rate based on direct labor hours and proportion of direct labor hours used under both products are equal. However in part c overhead cost was allocated by using two different cost driver and proportion of use of cost driver is also not equal among the products. That\'s why per unit allocated cost in (a) different from per unit activity cost assigned to product in (c)