Homework SourseChurchill Products is considering updating its cost system t
Churchill Products is considering updating its cost system to an activity-based costing system and is interested in understanding the effects. The company’s cost accountant has identified three overhead cost pools along with appropriate cost drivers for each pool.
The company manufactures three models of water basins (Oval, Round, and Square). The plans for production for the next year and the budgeted direct costs and activity by product line are as follows:
Required:
a. The current cost accounting system charges overhead to products based on direct labor-hours. What unit product costs will be reported for the three products if the current cost system continues to be used? (Do not round intermediate calculations. Round \"Per unit cost\" answers to 2 decimal places.)
c. What are the cost driver rates for the three cost pools identified by the cost accountant? (Round your answers to 2 decimal places.)
d. What unit product costs will be reported for the three products if the ABC system suggested by the cost accountant\'s classification of cost pools is used? (Do not round intermediate calculations. Round \"Per unit cost\" answers to 2 decimal places.)
e. If management should decide to implement an activity-based costing system, what benefits should it expect?
| Cost Pools | Costs | Activity Drivers | |||
| Utilities | $ | 280,000 | 56,000 | machine-hours | |
| Scheduling and setup | 280,000 | 560 | setups | ||
| Material handling | 785,000 | 1,570,000 | pounds of material | ||
Solution
a)
Overhead per unit if current System is used
Oval
Round
Square
Total
Total Direct Cost
90000
70000
70000
230000
Overhead Amount
$ 1,345,000.00
Labor Hours
3500
1500
5000
10000
Overhead Per Hour
$ 134.50
Overhead Allocation as per Labor hour
$ 470,750.00
$ 201,750.00
$ 672,500.00
$ 1,345,000.00
Total Cost
$ 560,750.00
$ 271,750.00
$ 742,500.00
$ 1,575,000.00
c)
Cost Drivers Rate
Activity
Cost Drivers
Total Activity Amount (A)
Level of Activity (B)
Activity Rate (C=A/B)
Utilities
Machine Hours
$ 280,000.00
56000.00
$ 5.00
Per Machine Hour
Scheduling and Setups
Number of Setups
$ 280,000.00
560.00
$ 500.00
Per setup
Material Handling
Pounds Of Material
$ 785,000.00
1570000.00
$ 0.50
Per Pound
$ 1,345,000.00
d)
Overhead per unit As per ABC system
Oval
Round
Square
Total
Total Direct Cost
$ 90,000.00
$ 70,000.00
$ 90,000.00
$ 1,345,000.00
Overheads Allocation
$ 425,000.00
$ 325,000.00
$ 595,000.00
$ 1,345,000.00
Total Cost
$ 515,000.00
$ 395,000.00
$ 685,000.00
$ 2,690,000.00
Units Produced
$ 3,800.00
$ 2,000.00
$ 5,500.00
$ 11,300.00
Overhead per unit
$ 135.53
$ 197.50
$ 124.55
Working 1 (OVAL) Overhead per unit
Oval
Activity rate(A)
Activity Driver Incurred (B)
Overhead Assigned (C=A*B)
Utilities
$ 5.00
30000
$ 150,000.00
Scheduling and Setups
$ 500.00
60
$ 30,000.00
Material Handling
$ 0.50
490000
$ 245,000.00
Total Overheads
$ 425,000.00
Production
3800.00
Overhead cost per unit
$ 111.84
Working 2 (Round) Overhead per unit
Round
Activity rate(A)
Activity Driver Incurred (B)
Overhead Assigned (C=A*B)
Utilities
$ 5.00
8000
$ 40,000.00
Scheduling and Setups
$ 500.00
280
$ 140,000.00
Material Handling
$ 0.50
290000
$ 145,000.00
Total Overheads
$ 325,000.00
Production
2000.00
Overhead cost per unit
$ 162.50
Working 3 (Square) Overhead per unit
Square
Activity rate(A)
Activity Driver Incurred (B)
Overhead Assigned (C=A*B)
Utilities
$ 5.00
18000
$ 90,000.00
Scheduling and Setups
$ 500.00
220
$ 110,000.00
Material Handling
$ 0.50
790000
$ 395,000.00
Total Overheads
$ 595,000.00
Production
5500.00
Overhead cost per unit
$ 108.18
e) Correct Answer ---If management implemented an activity-based costing system it should be provided with a more thorough understanding of product costs..
ABC System has nothing to do with Sales potential of a company it is just a method of allocating Overhead cost at a reasonable basis.
| a) | Overhead per unit if current System is used | ||||||||||
| Oval | Round | Square | Total | ||||||||
| Total Direct Cost | 90000 | 70000 | 70000 | 230000 | |||||||
| Overhead Amount | $ 1,345,000.00 | ||||||||||
| Labor Hours | 3500 | 1500 | 5000 | 10000 | |||||||
| Overhead Per Hour | $ 134.50 | ||||||||||
| Overhead Allocation as per Labor hour | $ 470,750.00 | $ 201,750.00 | $ 672,500.00 | $ 1,345,000.00 | |||||||
| Total Cost | $ 560,750.00 | $ 271,750.00 | $ 742,500.00 | $ 1,575,000.00 | |||||||
