Answers
Answer :
1.
Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours
= $800,000 ÷ 25,000* = $32 per direct labor hour
*25,000 budgeted direct-labor hours = (3,000 units of Standard)(3 hrs./unit) +
(4,000 units of Enhanced)(4 hrs./unit)
| Standard | Enhanced | |
| Direct material……………. | $ 25 | $ 40 |
| Direct labor: | ||
| 3 hours x $12………… | 36 | |
| 4 hours x $12………… | 48 | |
| Manufacturing overhead: | ||
| 3 hours x $32………… | 96 | |
| 4 hours x $32………… | 128 | |
| Total cost…………………. | $157 | $216 |
2.
Activity-based overhead application rates:
| Activity | Cost | Activity Cost Driver | Application Rate | ||
| Order processing | $150,000 | ÷ | 500 orders processed (OP) | = | $300 per OP |
| Machine processing | 560,000 | ÷ | 40,000 machine hrs. (MH) | = | $14 per MH |
| Product inspection | 90,000 | ÷ | 10,000 inspection hrs. (IH) | = | $9 per IH |
Order processing, machine processing, and product inspection costs of a Standard unit and an Enhanced unit:
| Activity | Standard | Enhanced |
| Order processing: | ||
| 300 OP x $300……………... | $ 90,000 | |
| 200 OP x $300……………... | $ 60,000 | |
| Machine processing: | ||
| 18,000 MH x $14…………... | 252,000 | |
| 22,000 MH x $14…………... | 308,000 | |
| Product inspection: | ||
| 2,000 IH x $9……………….. | 18,000 | |
| 8,000 IH x $9………………. | 72,000 | |
| Total | $360,000 | $440,000 |
| Production volume (units) | 3,000 | 4,000 |
| Cost per unit | $120* | $110** |
* $360,000 ÷ 3,000 units = $120
** $440,000 ÷ 4,000 units = $110
The manufactured cost of a Standard unit is $181, and the manufactured cost of an Enhanced unit is $198:
| Standard | Enhanced | |
| Direct material………………………………. | $ 25 | $ 40 |
| Direct labor: | ||
| 3 hours x $12…………………………… | 36 | |
| 4 hours x $12…………………………… | 48 | |
| Order processing, machine processing, and product inspection……………….. | 120 | 110 |
| Total cost……………………………………. | $181 | $198 |
3.
a.
The Enhanced product is overcosted by the traditional product-costing system. The labor-hour application base resulted in a $216 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $198. The opposite situation occurs with the Standard product, which is undercosted by the traditional approach ($157 vs. $181 under ABC).
b.
Yes, especially since the company's selling prices are based heavily on cost. An overcosted product will result in an inflated selling price, which could prove detrimental in a highly competitive marketplace.
Customers will be turned off and will go elsewhere, which hurts profitability. With undercosted products, selling prices may be too low to adequately cover a product's more accurate (higher) cost. This situation is also troublesome and will result in a lower income being reported for the company.
.