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yawa3891 [41]
3 years ago
13

PB10.

Business
1 answer:
Naily [24]3 years ago
8 0

Question: Casey’s Kitchens’ three cost pools and overhead estimates are as follows:

Cost Pool                            Cost Driver                  Est. Overhead  

Machine Setups                     Setups                          $250000

Assembly                        Numbers of Parts                 $300000

Machine Maintenance      Machine hours                  $<u>500000</u>

                               <u>Total</u>                                             $<u>1,050,000</u>

Cost Driver            Use per Product A    Use per Product B   Total

Setups                               7000                          3000               <u>10000</u>

Numbers of Parts            25000                        35000             <u>60000</u>

Machine hours                 10000                        40000             <u>50000</u>

The Question is the Extension of previous question in the book and the only required data from the previous question for this question is Number of units produced of A and B which is 20000 units and 50000 units.

Compare the overhead allocation using:

The traditional allocation method

The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

Answer:

<h2><u>TRADITIONAL ABSORPTION COSTING</u></h2><h3></h3><h2>Step 1:  Identify Absorption Basis </h2>

Here absorption basis is Machine hours.

<h2>Step 2:  Find the Overhead Absorbed by total units of Product A and B.</h2>

The formula is as under:

Overhead Absorbed=Total Overhead * Absorption Basis Share/Total Absorption Basis

For Product A:

Overhead absorbed =$1,050,000 * 10000 Machine Hrs/50000 Machine Hrs= $210,000 overhead absorbed in 20000 units of product A.

For Product B:

Overhead absorbed =$1,050,000 * 40000 Machine Hrs/50000 Machine Hrs= $840,000 overhead absorbed in 50000 units of product B.

<h2>Step 3:  Divide the Overhead Absorbed by Number of units to compute Overhead per Unit </h2>

Overhead per unit of A= Overhead absorbed by A / Total units of A

Overhead per unit of A= $210,000/ 20,000 Units= $10.5 per Unit

Overhead per unit of B= Overhead absorbed by B / Total units of B

Overhead per unit of A= $840,000/ 50,000 Units= $16.8 per Unit

<h2>Step 4: Add the per unit prime cost to Overhead cost per unit calculated in the Step 3 to calculate the total unit cost of the product. </h2>

The prime cost per unit is not given in this question but let us assume that it is $10 per unit for product A and $20 per unit for product B.

Now

For product A:

Total Unit cost of product A= Overhead cost per unit for A + Prime cost per unit for A

Total Unit cost of product A= $10.5 per unit + $10 per unit= $20.5 per unit

For product B:

Total Unit cost of product B= Overhead cost per unit for B + Prime cost per unit for B

Total Unit cost of product B= $16.8 per unit + $20 per unit= $36.8 per unit

<u></u>

<h2><u>ACTIVITY BASED COSTING</u></h2><h2>Step 1: Identify cost pools and their relevant cost drivers.</h2>

Cost Pool                            Cost Driver                  Est. Overhead  

Machine Setups                     Setups                          $250000

Assembly                        Numbers of Parts                 $300000

Machine Maintenance      Machine hours                  $500000

<h2>Step 2: Assign the cost of each activity (cost pool) on a fair basis (cost drivers) to Product A and B</h2>

Cost assigned to total products of <u>X</u> = Cost pool*(units of cost driver consumed by total # of Products A / total units of relevant cost driver consumed)

<h2><u>For Product A:</u></h2>

Machine setup cost

$250,000 * (7000 setups  for A/ 10,000 total setups)= $175,000 for 20000 units of A

Assembly Cost

$300,000 * (25,000 number of parts for A/ 60,000 total number of parts)= $125,000 for 20000 units of A

Machine Maintenance

$500,000 * (10,000 machine hrs for A/ 50,000 total machine hrs)= $100,000 for 20000 units of A

Total Overhead cost assigned to 20000 units of Product A= $175,000 + $125,000 + $100,000=$400,000

<h2><u>For Product B:</u></h2>

Machine setup cost

$250,000 * (3000 setups  for B/ 10,000 total setups)= $75,000 for 50000 units of B

Assembly Cost

$300,000 * (35,000 number of parts for B/ 60,000 total number of parts)= $175,000 for 50000 units of B

Machine Maintenance

$500,000 * (40,000 machine hrs for B/ 50,000 total machine hrs)= $400,000 for 50000 units of B

Total Overhead cost assigned to 50000 units of Product B= $75,000 + $175,000 + $400,000=$650,000

<h2>Step 3:  Divide the Answer from the step 3 by total units of product A produced to calculate unit cost</h2>

Overhead cost per unit = Total Overhead cost assigned to total units of X / Total Units of X

Overhead cost per unit For Product A= $400,000/20000 Units=$20 per unit

Overhead cost per unit For Product B= $650,000/50000 Units=$13 per unit

<h2>Step 4: Add prime cost per unit to it to calculate total unit cost of each product A and B.</h2>

The prime cost per unit is not given in this question but let us assume that it is $10 per unit for product A and $20 per unit for product B.

Now

For product A:

Total Unit cost of product A= Overhead cost per unit for A + Prime cost per unit for A

Total Unit cost of product A= $20 per unit + $10 per unit= $30 per unit

For product B:

Total Unit cost of product B= Overhead cost per unit for B + Prime cost per unit for B

Total Unit cost of product B= $13 per unit + $20 per unit= $33 per unit

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