1 Problem 2: Tebow 2 3 Tebow Inc. manufactures three products and it is estimated that the following activity will take place during the next production period: 5 Product 5 A Total output (units) Direct material costs per unit ($) Machine hours per unit Total machine hours worked 10,000 14 0.5 5,000 20,000 1,000 17 1.5 30,000 22 1 1,000 7 B 3 C o Indirect manufacturing overheads for the period are estimated at $360,000. 1 Overheads are currently allocated to products using the total number of machine hours worked. 2 The company is about to implement an activity-based costing (ABC) system and 3 analysis of overhead has identified the following activity cost pools and cost drivers: 4 5 Overhead cost pools 6 Machine maintenance 7 Set up costs Materials ordering 9 Finishing activity Product testing 1 Total overhead 2 3 Product 4 Machine hours worked 5 Number of set-ups 6 Number of materials orders 7 Number of finishing hours Number of product tests $ Activity-based cost drivers 153,000 Machine hours worked 62,100 Number of set-ups 89,100 Number of materials orders 21,600 Number of finishing hours 34,200 Number of product tests 360,000 A 5,000 3 200 120 50 9 36,000 B C Total 30,000 6 1,000 9 36,000 18 1480 300 1,980 100 20 240 25 75 150 Required: 1 a. Calculate a predetermined overhead allocation rate (POHR) assuming that 2 all manufacturing overheads are allocated using the total machine hours (MH) worked 3 4 POHR = 5 per machine hour 6 b. Calculate the total cost per unit for each product using the traditional cost allocation rate calculated in part a) 7 (HINT: do not forget the direct costs for each product) 8 Product name DM costs per unit 1 DL costs per unit 2 Allocated MOH costs per unit A 0 B 0 C 0 3 Total unit costs 4 sc. Using the activity-based costing (ABC), calculate the overhead allocation rate for each overhead cost pool. 6 7 Activities Activities cost pools Cost drivers Activity rates 8 Machine maintenance MH 9 Set up costs 1 Finishing activity Set up Materials ordering Material orders Finishing hours 2 Product testing Tests 3 4 d. Calculate the total cost per unit for each product using ABC. Clearly show all intermediate workings. 5 6 Product name A B C 7 DM costs per unit 8 DL costs per unit 0 0 0 9 Overhead costs Machine maintenance o 1 Set up costs 2 Materials ordering 3 Finishing activity 4 Product testing 5 Total MOH costs 6 MOH costs per unit 7 Tota costs per unit 8 9 e. Briefly explain why the cost per unit computations calculated in parts (b) and (c) are different 0 Briefly explain why ABC result in more accurate product costs for each of the three products? 1 2 Solution: 3