Tebow Inc. manufactures three products and it is estimated that the following activity will take place during
Question:
Tebow Inc. manufactures three products and it is estimated that the following activity will take place during the next production period:
Product | Total output (units) | Direct material costs per unit ($) | Machine hours per unit | Total machine hours worked |
A | 10,000 | 14 | 0.5 | ? |
B | 20,000 | 17 | 1.5 | ? |
C | 1,000 | 22 | 1.0 | ? |
Indirect manufacturing overheads for the period are estimated at $360,000. Overheads are currently allocated to products using the total number of machine hours worked. The company is about to implement an activity-based costing (ABC) system and analysis of overhead has identified the following cost pools, cost drivers and product support activities:
Overhead cost pools | $ | Activity-based cost drivers |
Machine maintenance | 153,000 | Machine hours worked |
Set up costs | 62,100 | Number of set-ups |
Materials ordering | 89,100 | Number of materials orders |
Finishing activity | 21,600 | Number of finishing hours |
Product testing | 34,200 | Number of product tests |
Total overhead | 360,000 |
Product | Number of set ups | Material orders | Number of finishing hours | Number of product tests |
A | 3 | 200 | 120 | 50 |
B | 6 | 1,480 | 100 | 25 |
C | 9 | 300 | 20 | 75 |
Required:
Calculate a predetermined overhead allocation rate assuming that all manufacturing overheads are allocated using the total machine hours worked
Total estimated manufacturing overheads = Predetermined overhead rate per MH worked
Total estimated machine hours worked
Calculate the total cost per unit for each product using the traditional cost allocation rate calculated in part a) (HINT: do not forget the direct costs for each product)
Calculate the total cost per unit for each product using ABC. Clearly show all intermediate workings.
Briefly explain why the cost per unit computations calculated in parts (b) and (c) are different. Does ABC result in more accurate product costs for each of the three products?
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr