Homework SoursePelles Inc produces two different products Product A and Pro
Pelles, Inc. produces two different products, Product A and Product B. Pelles uses a traditional volume-based costing system in which direct labor hours are the allocation base. Pelles is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design, Production, and Inpsection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.50/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows (5 points):
Design
(Engineering hours)
Production
(Direct Labor Hours)
Inspection
(Batches)
Required: a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. (Predetermined Overhead rate*Direct Labor Hour Per Unit) 2.50 X (100,000/
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
| Activity Rate | usage by Product A | usage by Product B | |
| Design (Engineering hours) | $600/hour | 200 | 300 |
| Production (Direct Labor Hours) | $1.25 | 100,000 | 300,000 |
| Inspection (Batches) | $500 | 300 | 100 |
Solution
Hey Dear Student !!
A)
Indirect Manufacturing Cost for Product A in Traditional method:
No of Direct Labour Hours X pre determined rate of overhead
100000 Hours X $2.50= $250000
B)
Indirect Manufacturing Cost for Product B in Traditional method:
No of Direct Labour Hours X pre determined rate of overhead
300000 Hours X $2.50= $750000
C)
Indirect Manufacturing Cost for Product A in Activity Based method:
Design Cost+Production Cost+Inspection Cost
Design Cost: Cost per Engineering Hours X Engineering Hours
$600X200= $120000
Production Cost: Cost per Direct Labour HourX Direct Labour Hours Used
$1.25X100000= $125000
Inspection Cost: Cost per Batch X No of Batches
$500X300= $150000
Total Cost= 120000+125000+150000
= $395000
D)
Indirect Manufacturing Cost for Product B in Activity Based method:
Design Cost+Production Cost+Inspection Cost
Design Cost: Cost per Engineering Hours X Engineering Hours
$600X300= $180000
Production Cost: Cost per Direct Labour HourX Direct Labour Hours Used
$1.25X300000= $375000
Inspection Cost: Cost per Batch X No of Batches
$500X100= $50000
Total Cost= 180000+375000+50000= $605000
Pleasure Teaching You !!
