PR 5-46 (Static) Activity-Based Costing; Cost Analysis (LO 5-1, 5-2, 5-4, 5-5, 5-7)

Skip to question

[The following information applies to the questions displayed below.]

Ontario, Incorporated, manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the companys products follows.

Standard:

Estimated production volume, 3,000 units

Direct-material cost, $25 per unit

Direct labor per unit, 3 hours at $12 per hour

Enhanced:

Estimated production volume, 4,000 units

Direct-material cost, $40 per unit

Direct labor per unit, 4 hours at $12 per hour

Ontarios overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

	Orders Processed	Machine Hours Worked	Inspection Hours
Standard	300	18,000	2,000
Enhanced	200	22,000	8,000
Total	500	40,000	10,000

PR 5-46 (Static) Part 1 Top management is very concerned about declining profitability

Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installedmachinery that was expected to produce significant operating efficiencies. products if the expected manufacturing volume is attained.

Ontarios selling prices are based heavily on cost.

1. By using direct-labor hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product.