CD4 - Excel

As you learned in the previous chapters, Current Designs has two main product lines - composite kayaks, which are handmade and

very labor-intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Design's

controller, Diane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to

ensure that costs are appropriately assigned to the company's products. At the same time, the system that is used must not be so

complex that its costs are greater than its benefits.

Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead.

Activities

Cost

Designing new models

$121,000

Creating and testing prototypes

152,000

Creating molds for kayaks

188,500

Operating oven for the rotomolded kayaks

40,000

Operating the vacuum line for the composite kayaks

28,000

Supervising production employees

180,000

Curing time :(the time that is needed for the chemical

processes to finish before the next step in

the production process; many of these

costs are related to the space required in

the building)

190,500

Total

$900,000

As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating

the vacuum line for the composite kayaks can be directly assigned to each of these products lines and do not need to be allocated

with the other costs.

Instructions

For purpose of this analysis, assume that Current Designs uses $234,000 in direct labor costs to produce 1,000 composite kayaks

and $286,000 in direct labor costs to produce 4,000 rotomolded kayaks each year.

(a) One method of allocating overhead would allocate the common costs to each product line by using a allocation basis such as

the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak.

Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space

and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven

and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the

rotomolded kayak line, and the amount to be assigned to each of the units in each line.

(b) Another method of allocating overhead is to use direct labor dollars as an allocation basis. Remembering that the costs of the

oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor

dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product

line using this method.

(c) Activity-based costing requires a cost driver for each cost pool. Use the following information to assign the costs to the product

lines using the activity-based costing approach.

Driver Amount for

Driver Amount for

Activity Cost Pools

Cost Drivers

Composite Kayaks

Rotomolded Kayaks

Designing new models

Number of models

3

1

Creating and test prototypes

Number of prototypes

6

2

Creating molds for kayaks

Number of molds

12

1

Supervising production kayaks

Number of employees

12

12

Curing time

Number of days of curing time

15,000

2,000

What amount of overhead should be assigned to each composite kayak using this method? What amount of overhead

should be assigned to each rotomolded kayak using this method?

(d) Which of the three methods do you think Current Designs should use? Why?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

After you have completed CD4, consider the additional question.
1. Assume that the number of prototypes created for composite kayaks and rotomolded kayaks changed to 8 and 4 respectively.
Redo instruction (c) and round cost assigned /unit to two decimal points.