Answer:
Deoro Company
Unit cost for each model
Model A Model B
1. Using direct labor hours $176.72 $232.815
2. Using the four activity drivers $136.45 $298.20
3. ABC (method 2) produces the more accurate cost assignment. The overhead cost depends on the level of activity consumed by each model.
Explanation:
a) Data and Calculations:
Activity Expected Cost Activity Driver Activity Capacity
Setting up equipment $492,880 Number of setups 610
Ordering costs 372,000 Number of orders 18,600
Machine costs 963,600 Machine hours 43,800
Receiving 501,600 Receiving hours 11,400
Total overhead costs $2,330,080
Activity rates:
Setting up equipment = $808 ($492,880/610) per setup
Ordering costs = $20 ($372,000/18,600) per order
Machine costs = $22 ($963,600/43,800) per machine hour
Receiving = $44 ($501,600/11,400) per receiving hour
Total direct labor hours = 8,000
Total overhead costs = $2,330,080
Predetermined overhead rate using direct labor hours:
= $291.26 ($2,330,080/8,000)
Unit cost for each model:
Using direct labor hours to apply overhead:
Model A Model B
Direct materials $600,000 $800,000
Direct labor $480,000 $480,000
Overhead $1,747,560 $582,520
Total costs $2,827,560 $1,862,520
Unit costs $176.72 $232.815
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
Overhead assigned to:
Using predetermined rate based on direct labor hours:
Model A Model B
Overhead rate = $291.26 per direct labor hours
Direct labor hours 6,000 2,000
Using direct labor hours $1,747,560 $582,520
Using activity-based costing method:
Rates Model A Model B
Setting up equipment = $808 $323,200 ($808*400) $161,600 ($808 * 200)
Ordering costs = $20 120,000 ($20 *6,000) 240,000 ($20 * 12,000)
Machine costs = $22 528,000 ($22 *24,000) 396,000 ($22 * 18,000)
Receiving = $44 132,000 ($44 * 3,000) 308,000 ($44 * 7,000)
Total overhead assigned $1,103,200 $1,105,600
Using activity-based rates to apply overhead:
Model A Model B
Direct materials $600,000 $800,000
Direct labor $480,000 $480,000
Overhead $1,103,200 $1,105,600
Total costs $2,183,200 $2,385,600
Units completed 16,000 8,000
Unit costs $136.45 $298.20