18 2 Overhead costs are allocated below: 19 Overhead allocated to Desk is: Overhead allocated to Table is: 20 Desk Table 21 22 23 Predetermined Overhead Rate Cost Driver Activity Activity Purchase orders Overhead Allocated Cost Driver Activity 24 25 Machine setups Machine maintenance Quality inspections Total overhead costs allocated 26 Overhead Allocated S 80,000 320,000 4,000 800 per order 3200 per setup 40 per machine hour 60 per inspection Incorrect Incorrect Incorrect Correct Incorrect Incorrect 27 28 Incorrect 29 Incorrect Incorrect Incorrect 30 Total companywide overhead costs S6.000.000 32 33 Overhead cost per unit for each product (rounded to nearest cent) $286.-10 Incorrect COTECT SE GD 41. Activity-Based Costing Versus Traditional Approach, Activity-Based Management. Fine Finishing, Inc., produces a wood desk that sells for $500 and a wood table that sells for $900. Last year, total overhead costs of $6,000,000 were allocated based on direct labor costs. Direct labor costs totaled $2,000,000 last year, and the company produced 15,000 desks and 5,000 tables. Total direct labor and direct materials costs by product for last year were as follows: Desk Table Direct materials $1,575,000 $950,000 Direct labor $1,200,000 $800,000 The management of Fine Finishing, Inc., would like to use activity-based costing to allocate overhead rather than one plantwide rate based on direct labor costs. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs: Estimated Cost Driver Activity Estimated Overhead Costs Activity Cost Driver Desk Table Total Purchase orders Number of purchase orders $ 800,000 900 100 1,000 Machine setups Number of setups 1.600.000 240 260 500 N Machine Machine hours 21400.000 maintenance 42.000 18,000 60,000 Quality inspections Number of inspections 1,200,000 15.000 5,000 20,000 Total $ 6.000.000 Required: C. 1. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. (Hint: step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.) 2. Using the activity-based costing allocation method, allocate overhead to each product. (Hint: This is step 5 in the activity-based costing process.) Determine the overhead cost per unit. Round results to the nearest dollar. 3. What is the product cost per unit for the desk and table products? d. Calculate the per unit profit for each product using the plantwide approach and the activity-based costing approach. How much did the per unit profit change when moving from one approach to the other? e. Refer to the estimated cost driver activity provided. Calculate the percent of each activity consumed by each product (for example, the desk product issued 900 of the 1,000 purchase orders issued in total and therefore consumes 90 percent of this activity). These percentages represent the amount of overhead costs allocated to each product using activity-based costing. Using the plantwide approach, 60 percent of all overhead costs are allocated to the desk and 40 percent to the table. Compare the activity-based costing percentages to the percentage of overhead allocated to each product using the plantwide approach. Use this information to explain what caused the shift in overhead costs to the desk product using activity-based costing. J K N L M Answer for Desk is: Incorrect c. (3 Per unit product costs (rounded to nearest dollar): Desk Direct materials (from parta) Direct labor (from parta) Overhead (from partc (2) Total product cost per unit Table Answer for Table is: Incorrect Incorrect Incorrect 386 Incorrect Correct Incorrect Incorrect d. Traditional Costing (Direct labor costs as the allocation base); rounded to nearest dollar Desk Table Direct materials Incorrect Incorrect Direct labor Overhead Incorrect Incorrect 480 Incorrect Correct Incorrect Total product cost per unit (a) Sales price (b) Profit = (b) - (a) Incorrect Incorrect Incorrect 1 S 70 Incorrect Correct 3 Activity-Based Costing (Several different allocation bases); rounded to nearest dollar 25 Desk 26 Table Direct materials Direct labor 27 Incorrect Incorrect Incorrect Incorrect 28 Overhead 29 Incorrect Incorrect Incorrect 30 Total product cost per unit (C) Sales price (d) Profit (loss) = (d) - (C) Incorrect 31 Incorrect Incorrect 27 S 164 Incorrect Correct 33 34 35 36 37 e. The percent calculations are as follows: 38 39 Desk Table 10% 40 41 Purchase orders Machine setups Machine maintenance Quality inspections 42 Incorrect Incorrect Incorrect Incorrect Correct Incorrect Incorrect Incorrect 44 45 PS3