Answer:
Explanation:
Unit Level Batch Level Product Level Facility Level Total
Cost $ 180,000 $ 40,000 $ 20,000 $ 240,000 $ 480,000
Cost driver 1,500 labor hrs. 40 setups Percentage of use 12,000 units
a) Allocation Rate per labor hour = Total overhead/ Total labor hours
=$480,000/1500 labor hours
= $320 per labor hour
Overhead to be allocated on the basis of labor hours = 200 hours *$320/ hour = $64,000
b) Level Unit Batch Product Facility Total Allocated Cost
Cost (a) $ 180,000 $ 40,000 $ 20,000 $ 240,000
Driver (b) 1500 40 % of Use 12000
Rate (a / b=c) $120 per hr $1000/Setup % of Use $20/Unit
Weight (d) 200 Hrs 6 Setups 0.15 800 Units
Allocation (c x d) $24,000 $6,000 $3,000 $ 16,000 $ 49,000
c) OH cost per unit using DL Hrs = $64,000 / 800 units = $80.00
OH cost per unit under ABC = $49,000/ 800 Units = $61.25
Particulars ABC Labor Hrs
Allocated overhead $61.25 80
Direct cost $240 $240
Total cost per unit(a) $301.25 $320.00
Desired profit (30%*a) $90.38 $96.00
Sales price $391.63 $416.00
d) Cutting shears would be undercosted So it is overpriced. Overpricing can turn into a loss of business. As sales volume declines, cost per unit will increase, thereby causing further distortions in price. Profitability will suffer.
e) For long-term pricing decisions all costs should be included in a cost plus pricing decision. Accordingly, facility-level costs should be considered. Also, upstream and downstream costs should be included in the decision. However, if you are making a short-term special order decision, only the relevant ( differential) costs should be considered. Under these circumstances, facility-level costs should be ignored.