Home Entertainment, Inc., manufactures two types of DVD players: standard and deluxe. It attempts to set selling
Question:
Currently, the costs per unit are determined as follows:
Factory overhead is currently applied using a plant-wide rate based on direct labor cost. This years rate was computed as follows:
Budgeted factory overhead:
Direct labor support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
Machine support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Setup costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Design costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Budgeted direct labor cost is $333,333.
Budgeted factory overhead rate ¼ $1; 000; 000=$333; 333 ¼ 300% of direct labor dollars
Cash, knowing that you had recently studied activity-based costing in your cost accounting course, employs you as a consultant to determine what effect its usage would have on the product costs. You first gathered the following data:
Required:
1. From the data that you gathered, determine the best allocation base for each of the four components of factory overhead.
2. Compute an overhead rate for each of the four components.
3. Determine the new unit cost for standard and deluxe models using activity-based costing.
4. Why are the product costs so dramatically different when activity-based costing is used?
5. Would Home Entertainments selling prices be closer to those of the competition if activity-based costing wereused?
Step by Step Answer: