Question 4ABC question for review For many years Pioneer Lab

Question 4-ABC question for review For many years, Pioneer Laboratory Inc. has produced a single product, S109. With the advent of automation, the company added the technological capability to begin producing a second product Product N227. Because of the success of Product N227, manufacturing has been shifting toward its production. Sales of Product N227 are now 50 percent of the total annual sales of 20,000 units, and the company is optimistic about the new product\'s future sales growth. One reason the company is excited about the sales potential of its new product is that the new product\'s gross margin is higher than that of Product S109. Management is thrilled with the new product\'s initial success but concerned about the company\'s declining profits since the new product\'s introduction. Suspecting a problem with the company\'s costing system, management hires you, a managerial accountant, to investigate. In reviewing the company\'s records, product specifications, and manufacturing processes, you discover the following information. The company is an extremely competitive industry in which markups are low and accurate estimates of cost are critical to success. Product N227 has complex parts that require more labour, machine time, setups, and inspection than Product S109 Budgeted costs for direct materials and direct labour f Direct Cost per Unit Product S109 Product N227 Direct materials Direct labour $24 $24 $15/hour X 2 hrs production time $15/hour X 2.8 hrs production time The company presently allocates overhead costs to its products based on direct labour hours. After carefully studying the company\'s overhead, you identify four different categories of overhead costs. Using your knowledge of this company and similar companies in the same industry, you estimate the total costs for each of these categories and identify the most appropriate cost driver for measuring each product\'s overhead consumption. Detailed information for each cost category follows. Category Estimated Cost Cost Driver Number of Transactions Unit level 540,000 Number of machine hours S109: 20,000 machine hours N227: 60,000 machine hours Batch level Number of machine setups S109: 1,500 setups N227: 3,500 setups 228,000

Solution

Answer a-1 Calculation of predetermined overhead rate based on direct labour hours Predetermined Overhead rate = Total EstImated Overhead cost / Estimated direct labour hours Product S109 N227 Total Annual Production in Units 10000 10000 Direct Labour hours per unit 2 2.8 Total Direct Labour Hours 20000 28000 48000 Total estimated overheads = $540000 + $228000 + $60000 = $8,28,000 Predetermined Overhead rate = $8,28,000 / 48000 hours = $17.25 per direct labour hour Answer a-2 Calculation of overhead cost per unit that company currently assigns to each product Product S109 N227 Direct Labour hours per unit 2 2.8 x Overhead rate per hour $17.25 $17.25 Overhead cost per unit $34.50 $48.30 Answer a-3 Determination of total cost per unit for each product (using traditional costing approach) Product S109 N227 Direct Materials $24.00 $24.00 Direct Labour $30.00 $42.00 Overhead cost $34.50 $48.30 Total Cost per unit $88.50 $114.30 Answer b-1 Computation of predetermined overhead rate for each category of activity Unit level activity cost per machine hour = Estimated cost / Total machine hours = $540000 / 80000 machine hours = $6.75 per machine hour Batch level activity cost per machine setup = Estimated cost / Total machine setups = $228000 / 5000 setups = $45.60 per machine setup Factory level activity cost per product = Estimated cost / Total no.of products = $60000 /2 = $30,000 per product Answer b-2 Amount of overhead cost assigned to each product (total as well as per unit) using activity based costing Product S109 N227 Unit Level $135,000 $405,000 Batch Level $68,400 $159,600 Factory Level $30,000 $30,000 Total Overhead cost $233,400 $594,600 / No.of Units 10000 10000 Overhead cost per unit $23.34 $59.46 Answer b-3 Determination of total cost per unit for each product (using activity based costing) Product S109 N227 Direct Materials $24.00 $24.00 Direct Labour $30.00 $42.00 Overhead cost $23.34 $59.46 Total Cost per unit $77.34 $125.46