Gurdy Company manufactures two models of mechanical components $$ a Basic model

and an Advanced Model. The company considers all of its manufacturing overhead costs

to be fixed and its uses plantwide manufacturing overhead cost allocation based on direct

labor hours. Gurdy$$s controller prepared the segmented income statement that is shown

below for the most recent year $($she allocated selling and administrative expenses to

products based on sales dollars$)$:

Basic Advanced Total

Number of units produced and sold $20,00010,00030,000$

Sales $$3,000,000$ $$2,700,000$ $$5,700,000$

Costs of Goods Sold $2,197,5002,102,5004,300,000$

Gross margin $802,500597,5001,400,000$

Selling and administrative expenses $720,000480,0001,200,000$

Net operating income $($loss$)$ $ $82,500$ $$117,500$ $$200,000$

Direct laborers are paid $$35$ per hour. Direct materials cost $$25$ per unit for the Basic per

model and $$50$ per unit for the Advanced model. Gurdy is considering a change from

plantwide overhead allocation to a departmental approach. The overhead costs in the

company$$s Molding Department would be allocated based on machine hours and the

overhead costs in its Assemble and pack Department would be allocated based on direct

labor hours. To enable further analysis, the controller gathered the following

information:

Molding Assemble

and Pack

Total

Manufacturing overhead costs $$997,500$ $$552,500$ $$1,550,000$

Direct labor hours:

Basic $10,00020,00030,000$

Advanced $10,00010,00020,000$

Machine hours:

Basic $15,000-15,000$

Advanced $10,000-10,000$

Required:

$1.$ Using the plantwide approach:

a$.$ Calculate the plantwide overhead rate.

b$.$ Calculate the amount of overhead that would be assigned to each product.

$2.$ Using the departmental approach:

a$.$ Calculate the departmental overhead rates

b$.$ Calculate the total amount of overhead that would be assigned to each product

c$.$ Using the departmental overhead cost allocations. Redo the controller$$s

segmented income statement $($continue to allocate selling and administrative

expenses based on sales dollars$).$

$3.$ Gurdy$$s production manager has suggested using activity$-$based instead of either the

traditional or departmental approaches. To facilitate the necessary calculations, she

assigned the company$$s total manufacturing overhead cost to its five activity cost

pools as follows:

Activity Cost Pool Activity Measure Manufacturing

Overhead

Machining Machine hours in Molding $$467,500$

Assemble and Pack Direct labor hours in

Assemble and Pack

$282,500$

Order processing Number of customer orders $280,000$

Setups Setup hours $390,000$

Other $130,000$

Total overhead $$1,550,000$

She also determined that the average order size for the Basic and Advanced

models is $400$ units and $50$ units, respectively. The molding machines require a

setup for each order. One set hour is required for each customer order of the Basic

model and three hours are required to setup for an order of the Advanced model.

The company pays a sales commission of $5\%$ for the Basic model and $10\%$ for the

Advanced model. Its traceable fixed costs include $$150,000$ for the Basic model

and $$200,000$ for the Advanced model. The remainder of the company$$s selling

and administrative costs are organization$-$sustaining in nature.

Using the additional information provided by the production manager, calculate:

a$.$ An activity rate for each activity cost pool

b$.$ The total manufacturing overhead cost allocated to the Basic model and

the Advanced model using the activity$-$based approach.

c$.$ The total selling and administrative cost allocated to the basic model and

the Advanced model using the activity$-$based approach.

$4.$ Using your activity$-$based cost assignments from requirement $3,$ prepare a

contribution margin format segmented income statement that is adapted from Exhibit

$4-8$ from textbook.

$5.$ Explain how Gurdy$$s activity$-$based approach differs from its plantwide and

departmental approaches