Weston Ltd. manufactures two models of automotive parts€”LD and XD. Weston has been using the normal costing based on machine hours to allocate manufacturing overhead. Last year, the manufacturing overhead was $960,000, and machine hours used were 40,000 hours. Forty-fi ve percent of the machine hours were used for LD. Weston produced 12,000 units of LD, and 8,000 units of XD.
Weston is concerned that their costs may be too high for XD, as XD is priced higher than their main competitor, and the sales volume is significantly lower than LD. The sales manager is in discussions with the production manager and the cost accountant to see if there is another way to cost the manufacturing overhead. The cost accountant suggests using ABC costing, and gathers the following information from the production manager:

REQUIRED

A. Identify the cost hierarchy level for each activity.
B. What is the overhead rate based on the machine hours? How much total overhead cost was allocated to LD and XD? What is the unit overhead cost for LD and XD?
C. What is the overhead rate for each activity, using ABC costing? How much total overhead cost was allocated to LD and XD? What is the unit overhead cost for LD and XD?
D. Comparing the findings from (B) and (C), what should Weston do to address the costing issue of XD? Provide explanations to support your recommendations.

Transcribed Image Text:

Cost Driver number of designs number of setups number of units number of inspections Activity Cost LD XD 125 Product design Equipment setup Machine process Inspection & testing 175 $ 210,000 500 700 180,000 500,000 70,000 12,000 8,000 220 180 $ 960,000