Question

Terry Industries produces two electronic decoders, P and Q. Decoder P is more sophisticated and requires more programming and testing than does Decoder Q. Because of these product differences, the company wants to use activity-based costing to allocate overhead costs. It has identified four activity pools. Relevant information follows.

Activity Pools Cost Pool Total Cost Driver
Repair and maintenance on assembly machine $ 83,200 Number of units produced
Programming cost 91,260 Number of programming hours
Software inspections 6,090 Number of inspections
Product testing 13,600 Number of tests
Total overhead cost $ 194,150
Expected activity for each product follows.

Number of Units Number of Programming Hours Number of Inspections Number of Tests
Decoder P 17,000 1,500 194 1,300
Decoder Q 35,000 2,400 96 2,100
Total 52,000 3,900 290 3,400
Assume that before shifting to activity-based costing, Terry Industries allocated all overhead costs based on direct labor hours. Direct labor data pertaining to the two decoders follow.

Direct Labor Hours
Decoder P 11,000
Decoder Q 32,000
Total 43,000

a. Compute the amount of overhead cost allocated to each type of decoder when using direct labor hours as the allocation base. (Round intermediate calculations to 2 decimal places and final answers to the nearest dollar amount.)

b. Determine the cost per unit for overhead when using direct labor hours as the allocation base and when using ABC for each type of decoder. (Round intermediate calculations and final answers to 2 decimal places.)

Answer 1

Answer:

A.

Decoder P expends 11,000 labour hours, therefore its overhead costs = 11,000 x $4.52 = $49,720

Decoder Q expends 32,000 labour hours, therefore its overhead costs = 32,000 x $4.52 = $144,640

B.i. (based on labour hour rate)

Decoder P overhead costs per unit = $2.93 per unit

Decoder Q Overhead cost per unit = $4.13 per unit

B.ii. (based on Activity Base Costing)

Total costs

Decoder P = $70,911

Decoder Q = $121,505

Unit overhead costs =

Decoder P = $70,911 / 17,000 units = $4.17

Decoder Q = $121,505 / 35,000 units = $3.47

Explanation:

Overhead costs

Repair and Maintenance = $83,200

Programming costs = $91,260

Software Inspection costs = $6,090

Product testing = $31,600

Total overhead costs = $194,150

A. Overhead costs per labour hour based on direct labour hours = $194,150 divided by 43,000

= $4.52 per labour hour

Decoder P expends 11,000 labour hours, therefore its overhead costs = 11,000 x $4.52 = $49,720

Decoder Q expends 32,000 labour hours, therefore its overhead costs = 32,000 x $4.52 = $144,640

B. Overhead cost per unit

i. Using labour rate of $4.52 per labour hour

Decoder P expends 11,000 labour hours, therefore its overhead costs = 11,000 x $4.52 = $49,720

Overhead cost per unit = $49,720 / 17,000 units produced = $2.93 per unit

Decoder Q expends 32,000 labour hours, therefore its overhead costs = 32,000 x $4.52 = $144,640

Overhead cost per unit = $144,640 / 35,000 units produced = $4.13 per unit

ii. Using activity base costing

*Repair and Maintenance = $83,200 divided by 52,000 units produced = $1.6 per unit produced

Decoder P = $27,200

Decoder Q = $56,000

*Programming costs = $91,260 divided by 3,900 programming hours = $23.4

Decoder P = $35,100

Decoder Q = $56,160

*Software Inspection costs = $6,090 divided by 290 inspections = $21

Decoder P = $4,074

Decoder Q = $2,016

*Product testing = $13,600 divided by 3,900 tests = $3.49

Decoder P = $4,537

Decoder Q = $7,329

Total costs

Decoder P = $70,911

Decoder Q = $121,505

Unit overhead costs =

Decoder P = $70,911 / 17,000 units = $4.17

Decoder Q = $121,505 / 35,000 units = $3.47