Question

Julio produces two types of calculator, standard and deluxe. The company is currently using a traditional costing system with machine hours as the cost driver but is considering a move to activity-based costing. In preparing for the possible switch, Julio has identified two cost pools: materials handling and setup. The collected data follow:

standard Delux
Number of machine hours 25,700 30,700
Number of materials move 585 885
Number of set up 85 535

Total estimated overhead costs are $313, 020, of which $183, 750 is assigned to the material handling cost pool and $179, 180 is assigned to the setup cost pool.
Required:
(1) Calculate the overhead assigned to each product using the traditional cost system. (Round the overhead rate to four decimal places.)
(2) Calculate the overhead assigned to each product using ABC.

Answer 1

Answer:

Traditional costying system:

Standard  142,635

Deluxe      170,385

ABC system:

Standard:   97,690

Deluxe:    265,240

Explanation:

$\frac{Cost\: Of \:Manufacturing \:Overhead}{Cost \:Driver}= Overhead \:Rate$

we distribute the expected overhead over the expected cost dirver. In this case, machine hours:

overhead: 313,020

machine hours 25,700 + 30,700 = 56,400

overhead rate: 5.55

Standard 25,700 x 5.55 142635

Deluxe 30,700 x 5.55 170385

====================================

ABC we calculate a rate for each activity

183,750 material handling

materials movement: 585 + 885 = 1,470

rate: 125

179,180 setup cost

number of setup: 85 + 535 = 620

rate: 289

And now we apply this rate to each product.

Standard:

585 x 125 + 85 x 289  = 97690

Deluxe:

885 x 125 + 535 x 289  = 265240

Answer 2

(1). The overhead charged to each product using the traditional cost system is:

For Standard calculator  =142,635, and

For Deluxe calculator = 170,385

(2). The overhead charged to each product using the ABC cost system is:

For Standard calculator = 97,690,and

For Deluxe calculator = 265,240.

What is the overhead cost?

Overhead expense refers to any current expense of operating a business. Overheads are those expenditures which cannot be handily analyzed to any particular revenue unit, different from operating expenses such as raw material and labor.

Calculation of overheads:

(1). By Traditional Cost System:

By distributing the expected overhead over the expected cost driver. Then, machine hours would be:

Overhead = 313,020

Machine hours of Standard delux:

$\ 25,700 +\ 30,700 = \ 56,400$

Overhead Rate:

$\text{Overhead Rate}= \dfrac{\text{Indirect Costs}}{\text{Direct Costs}}\\\\\\\text{Overhead Rate}=\dfrac{\ 3,13,020}{\ 56,400}\\\\\\\text{Overhead Rate}=5.55\%$

Then, Overhead assigned to:

Standard Calculator:

$\ 25,700 \times 5.55 = \ 1,42,635$

Deluxe Calculator :

$\ 30,700 \times 5.55 = \ 1,70,385$

(2). By Using ABC:

material handling = $183,750

materials movement = 585 + 885 = 1,470

Overhead rate:

$\text{Overhead Rate}= \dfrac{\text{Indirect Costs}}{\text{Direct Costs}}\\\\\\\text{Overhead Rate}=\dfrac{\ 1,83,750}{\ 1,470}\\\\\\\text{Overhead Rate}=125\%$

Setup cost = $179,180

number of setup: 85 + 535 = 620

$\text{Overhead Rate}= \dfrac{\text{Indirect Costs}}{\text{Direct Costs}}\\\\\\\text{Overhead Rate}=\dfrac{\ 1,79,180}{\ 620}\\\\\\\text{Overhead Rate}=289\%$

Now, we apply this rate to both the product.

Standard:

$(585\times125 )+ (85\times289) = \ 97690.$

Deluxe:

$(885 \times 125) + (535\times 289) = \ 265240$.

Learn more about overheads, refer:

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