Question
1. Thermal Corporation has two producing department and two service departments labelled P1, P2, S1, S2 respectively. Direct costs for each department and the proportion
1. Thermal Corporation has two producing department and two service departments labelled P1, P2, S1, S2 respectively. Direct costs for each department and the proportion of service costs used by various departments are as follows:
Cost Center | Direct Costs | Proportion of services used by: | |||
S1 | S2 | P1 | P2 | ||
P1 | P100, 000 |
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P2 | P50, 000 |
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S1 | P15, 000 | - | 60% | 30% | 10% |
S2 | P25, 000 | 10% | - | 50% | 40% |
In calculating predetermined overhead rates, machine hours are used as the base in P1 and direct labor hours as the base in P2.
P1 P2
Machine hours 50, 000 40, 000
Direct labor hours 40, 000 20, 000
Requirements:
Allocate the service department costs to operating departments and compute the factory overhead rate for P1 and P2 using the following methods:
- Direct method
- Step method start with S1
- Algebraic method
2. The cost accountant of Above the Ankle is considering to use the ABC system in determining the cost of its products.
At present, the company uses the traditional costing system wherein factory overhead costs are allocated based on direct labor hours. The cost accountant believes that the present system maybe providing misleading cost information, hence, the plan to change to the ABC system. For the coming period, the company is planning to use 5,000 direct labor hours, and its total budgeted factory overhead amounts to P90,000, broken down as follows:
Activity | Cost Driver | Budgeted Activity | Budgeted Cost |
Setup costs | Number of set ups | 40 | P20,000 |
Production monitoring | Number of batches | 20 | P40,000 |
Quality control | Number of inspections | 1,000 | P30,000 |
Projected data for one of the Companys product, Product B, for the coming period are as follows:
Production and sales 1,000 units
Direct labor hours 2,000 hours
Units per batch 500
Number of setups 4
Number of inspections 200
Direct material cost P10 per unit
Direct labor rate P20 per hour
- If the Company will use the traditional full cost system, the cost per unit of product B for the coming period will be ____________.
- If the Company will use the ABC system, the cost per unit of product B for the coming year will be _________.
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