Answer:
Deoro Company
1. Unit cost using direct labor hours to apply overhead:
Unit Cost
Model A $167.985
Model B $226.99
2. Unit cost using the four activity drivers:
Unit Cost
Model A $133.97
Model B $287.28
3. Activity-based costing method always produces the more accurate cost assignment.
Explanation:
a) Data and Calculations:
Activity Expected Cost Activity Driver Activity Capacity
Setting up equipment $548,080 Number of setups 680
Ordering costs 313,200 Number of orders 17,400
Machine costs 939,400 Machine hours 42,700
Receiving 343,000 Receiving hours 9,800
Total overhead costs $2,142,680
Activity Rates:
Setting up equipment $806 per setup ($548,080/680)
Ordering costs $18 per order ($313,200/17,400)
Machine costs $22 per machine hour ($939,400/42,700)
Receiving $35 per receiving hour ($343,000/9,800)
Model A Model B
Direct materials $600,000 $800,000
Direct labor $480,000 $480,000
Overhead applied $1,063,500 $1,018,200
Total costs $2,143,500 $2,298,200
Units completed 16,000 8,000
Cost per unit $133.97 $287.275
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.
Assignment of overhead costs:
Model A Model B
Number of setups $322,500 (400 * $806) $161,200 (200 * $806)
Number of orders 108,000 (6,000 * $18) 216,000 (12,000 * $18)
Machine hours 528,000 (24,000 * $22) 396,000 (18,000 * $22)
Receiving hours 105,000 (3,000 * $35) 245,000 (7,000 * $35)
Total overhead applied $1,063,500 $1,018,200
Overhead based on direct labor hours:
Total overhead costs = $2,143,680
Total direct labor hours = 8,000 (6,000 + 2,000)
Overhead rate per DLH = $267.96
Allocation of overhead:
Model A Model B
Direct labor hours 6,000 2,000
Overhead (DLH) $1,607,760 ($267.96 *6,000) $535,920 ($267.96 * 2,000)
Model A Model B
Direct materials $600,000 $800,000
Direct labor $480,000 $480,000
Overhead applied $1,607,760 $535,920
Total costs $2,687,760 $1,815,920
Units completed 16,000 8,000
Cost per unit $167.985 $226.99
