PLANTWIDE VERSUS DEPARTMENTAL RATES, PRODUCTCOSTING ACCURACY: ACTIVITY-BASED COSTING Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model A’s production is much more laborintensive than that of Model B. Model B is also the more popular of the two speakers.

The following data have been gathered for the two products:

Product Data Model A Model B Units produced per year 30,000 300,000 Prime costs $100,000 $1,000,000 Direct labor hours 140,000 300,000 Machine hours 20,000 200,000 Production runs 40 60 Inspection hours 800 1,200 Maintenance hours 10,000 90,000 Overhead costs:

Setup costs $180,000 Inspection costs 140,000 Machining 160,000 Maintenance 180,000 Total $660,000 Required:

. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. Round to two decimal places.

. Compute the overhead cost per unit for each product by using ABC. Round to two decimal places.

. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine intensive) with a rate of $2.33 per machine hour and Department 2 (labor intensive) with a rate of $0.60 per direct labor hour.

The consumption of these two drivers is as follows:

Department 1 Machine Hours Department 2 Direct Labor Hours Model A 10,000 30,000 Model B 170,000 270,000 Compute the overhead cost per unit for each product by using departmental rates.

Round to two decimal places.

. Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. (Did the departmental rates do better than the plantwide rate?)

Problem