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