23 X 7 px A B C D E F G H I Current Designs has two main product lines - composite kayaks, which are handmade and very labor intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Design's controller, Dlane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company's products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits. 26 Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead. SHNAN Activities Designing new models Creating and testing prototypes Creating molds for kayaks Operating oven for the rotomolded kayaks Operating the vacuum line for the composite kayaks Supervising production employees Curing time (the time that is needed for the chemical processes to finish before the next step in the production process; many of these costs are related to the space required in the building) Total Cost $189,218.75 $237,500.00 $294,531.25 $62,500.00 $43,750.00 $281,250.00 $297,500.00 $1,406,250.00 32 As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating 33 the vacuum line for the composite kayaks can be directly assigned to each of these products lines and do not need to be allocated 34 with the other costs. 36 Instructions 37 For purpose of this analysis, assume that Current Designs uses $292,500 in direct labor costs to produce 2,000 composite kayaks 38 and $357,500 in direct labor costs to produce 8,000 rotomolded kayaks each year. 39 (a) One method of allocating overhead would allocate the common costs to each product line by using a allocation basis such as the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the rotomolded kayak line, and the amount to be assigned to each of the units in each line. 46 (b) Another method of allocating overhead is to use direct labor dollars as an allocation basis. Remembering that the costs of the 47 oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor 48 dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product line using this method. CDEF GH the vacuum line for the composite kayaks can be directly assigned to each of these products lines and do not need to be allocated with the other costs. Instructions For purpose of this analysis, assume that Current Designs uses $292,500 in direct labor costs to produce 2,000 composite kayaks and $357,500 in direct labor costs to produce 8,000 rotomolded kayaks each year. (a) One method of allocating overhead would allocate the common costs to each product line by using a allocation basis such as the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak. 1 Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the rotomolded kayak line, and the amount to be assigned to each of the units in each line. 46 (1) Another method of allocating overhead is to use direct labor dollars as an allocation basis. Remembering that the costs of the 47 oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product line using this method. 50 51 (c) Activity-based costing requires a cost driver for each cost pool. Use the following information to assign the costs to the product 52 lines using the activity based costing approach. Expected Use of Drivers Driver Amount for Driver Amount for S5 Activity Cost Pools Cost Drivers Composite Kayaks Rotomolded Kayaks 56 Designing new models Number of models Creating and test prototypes Number of prototypes Creating molds for kayaks Number of molds 59 Supervising production kayaks Number of employees Curing time Number of days of curing time 18.750 57 What amount of overhead should be assigned to each composite kayak using this method? What amount of overhead should be assigned to each rotomolded kayak using this method? Composite Kayaks 65 (d) Which of the three methods do you think Current Designs should use? Why? GY NOTE: Enter a number in cells requesting a value; enter a formula in cells with a "?". BCDE GH To B Determine the total amount to be assigned each of the units in each of the units in $ composite kayak line and the rotomolded kayak line, and the amount to be assigned to each line. 73 Composite Value Rotomolded Value 74 Directly assigned Remaining amount allocated 50% to each product line 75 15 12 Value Value 2 Total Number of units Cost assigned per unit Value Value 1 Determine the amount of overhead that should be assigned to each unit of each product using direct labor dollars as an allocation basis. Overhead Rate Total OH costs (a). Value Direct labor cost (b) Composite Rotomolded Value ? OH rate (a) (b) Composite Rotomolded Valyje Value Directly assigned Remaining amount allocated based on direct labor costs Total Number of units Cost assigned per unit > > Value V alue 100 101 What amount of overhead should be assigned to each composite kayak and rotomolded kayak using the activity based costing method? Estimated Use Activity Based Activity Cost Pools Estimated Overhead of Cost Drivers OH Rates Design Vale Value / model Prototypes Value Value / prototype Molds Valse Value / mold Supervision Valve Value S / employee Curing time Value Value / day Como send Rotorusidedad 102 103 106 A B C D E F H 502 103 What amount of overhead should be assigned to each composite kayak and rotomolded kayak using the activity based costing method? Estimated Use Activity-Based Activity Cost Pools Estimated Overhead of Cost Drivers OH Rates Design / model Prototypes / prototype Molds Value mold Supervision Vale employee Curing time / day Composed Rotomodedoad Activity Cost Pools Expected Use of Drivers Rates Cost Assigned Expected Use of Drivers Rates Design Vahe val Prototypes Whe Molds Supervision Curing time Cost Assigned Total amount allocated Directly assigned Total Cost (a) Number of units(b) Cost assigned/unit (a) (b) 118 123 122 (d) Which of the three methods do you think Current Designs should use? Why