Question
10) ABC: Comparison to traditional costing Palms Surf manufactures surfboards. The company produces two models: the starter board and the pro board. Data regarding the
10) ABC: Comparison to traditional costing Palms Surf manufactures surfboards. The company produces two models: the starter board and the pro board. Data regarding the two boards are as follows:
Product | Direct Labour hours per unit | Annual Production | Total direct labour hours |
Pro | 2.5 | 10000 boards | 25000 |
Starter | 1.5 | 30000 boards | 45000 |
The pro board requires $85 in direct materials per unit, whereas the started board requires $50. The company pays an average direct labour rate $14 per hour. The company has historically used direct labour hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The pro board is more complex to manufacture than the starter board because it requires more machine time.
Gabriel, the companys controller, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining Gabriel has identified the following four separate activity centres.
Volume of annual activity | ||||
Activity Centre | Cost Driver | Traceable costs | Pro Board | Starter board |
Machine set up | Number of set-ups | $100, 000 | 100 | 100 |
Special design | Design hours | $364,000 | 900 | 100 |
Production | Direct labour hours | $900,000 | 10000 | 30000 |
Machining | Machine hours | $300,000 | 9000 | 1000 |
a) Calculate the overhead rate based on traditional overhead allocation with direct labour hours as the base.
b) Determine the total cost to produce one unit of each product (use the overhead rate calculated in question a.)
c) Calculate the overhead rate for each activity centre based on activity- based costing techniques
d) Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question c) e) Explain why overhead cost shifted from the high- volume product to the low- volume product under the activity-based costing.
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