Question

Multiple Versus Single Overhead Rates, Activity Drivers Deoro Company has identified the following overhead activities, costs, and activity drivers for the coming year: Activity Expected Cost Activity Driver Activity Capacity Setting up equipment $480,000 Number of setups 600 Ordering costs 360,000 Number of orders 18,000 Machine costs 840,000 Machine hours 42,000 Receiving 400,000 Receiving hours 10,000 Deoro produces two models of dishwashers with the following expected prime costs and activity demands: Model A Model B Direct materials $600,000 $800,000 Direct labor $480,000 $480,000 Units completed 16,000 8,000 Direct labor hours 6,000 2,000 Number of setups 400 200 Number of orders 6,000 12,000 Machine hours 24,000 18,000 Receiving hours 3,000 7,000 The company's normal activity is 8,000 direct labor hours. Required: 1. Determine the unit cost for each model using direct labor hours to apply overhead. Unit Cost Model A $ Model B $ 2. Determine the unit cost for each model using the four activity drivers. Round your answers to nearest cent. Unit Cost Model A $ Model B $ 3. Which method produces the more accurate cost assignment?

Answer 1

Answer:

1. $260  ; $165  and $225

2. $132.50  and $290

3. Activity Driver Method.

Explanation:

As per the data given in the question,

1)

Overhead rate =(Direct labor + Ordering cost + Machine cost +Receiving) ÷ (Direct labor hour for A + Direct labor hour for B)

= ($480,000 + $360,000 + $840,000 +$400,000) ÷ (6,000+$2,000)

= $260

Model A cost per unit = (Direct material +Setting up)÷Units +(Direct labor hour×Overhead rate÷Units)

=($600,000+$480,000)÷$16,000 +($6,000×$260÷ $16,000)

= $165

Model B cost per unit = ($800,000+$480,000)÷$8,000 +($2,000×$260÷ $8,000)

= $225

2)

Model A cost =((Direct material + direct labor)+(direct labor×no. of setups÷number of setup)+(ordering cost×no. of orders÷machine hours)+(machine costs×no. of orders÷machine hours)+(receiving×receiving hours÷receiving hours)) ÷ Units

= (($600,000+$480,000) + ($480,000×400÷600) + ($360,000×$12,000÷$18,000) +($840,000×$18,000÷$42,000) + ($400,000×3,000÷$10,000)) ÷ $16,000

= $132.50

Model B cost = (($800,000+$480,000) + ($480,000×200÷600) + ($360,000×$12,000÷$18,000) +($840,000×$18,000÷$42,000) + ($400,000×7,000÷$10,000)) ÷ $8,000

= $290

3)

The more accurate cost assignment is produced by Activity Driver Method.

We simply applied the above formulas