40. ABC and predetermined overhead rates. Assume that SunSpees Corporation makes three types of sunglasses, Razors, Slims, and Eagles, for major retailers such as Ray-Ban and Gucci. SunSpecs presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that SunSpecs switch to activity-based cost- ing. Management decided to give ABC a try and identified the following activities, cost drivers, and estimated costs for Year 2 for each activity center. Estimated Activity Recommended Cost Driver Annual Costs Annual Cost Driver Units Production Setup Order Processing Materials Handling Equipment Depreciation and Maintenance Quality Management Packing and Shipping Total Estimated Overhead ... Number of Production Runs Number of Orders Pounds of Materials Used Machine Hours Number of Inspections Number of Units Shipped $ 60,000 100,000 40,000 120,000 100,000 80,000 $500,000 200 400 16,000 20,000 800 80,000 The company estimated 10,000 labor hours would be worked in all of Year 2. Assume the following activities occurred in February of Year 2: Razors Slims Eagles 3,000 58.000 300 2,000 $5,000 200 1,000 $4,000 100 16 Number of Units Produced ......... Direct Materials Costs ........... Direct Labor Hours .. Number of Production Runs ...... Number of Orders .. Pounds of Material Used ........ Machine Hours ........ Number of Inspections ............ Units Shipped . . . . . . . Direct labor costs are $20 per hour ................. 300 800 800 16 500 400 20 2,000 54.000 3,000 $6,000 20 1,000 $2,000 a. Compute an overhead allocation rate for each of the cost drivers recommended by the consultant and for direct labor. b. Compute the production costs for each product for February using the cost drivers recommended by the consultant. c. Compute the production costs for each product for February using direct labor hours as the overhead allocation base. d. Management has seen your numbers and wants to know how you account for the discrepancy between the product costs using only direct labor hours as the over head allocation base and the product costs using activity-based costing, Write a brief response to management. 41. Choosing an ABC system. Free Wheeler, Ltd., manufactures three bicycle models Activity Recommended Cost Driver Annual Costs Annual Cost Driver Units Production Setup Order Processing Materials Handling Equipment Depreciation and Maintenance Quality Management Packing and Shipping Total Estimated Overhead ........ Number of Production Runs Number of Orders Pounds of Materials Used Machine Hours Number of Inspections Number of Units Shipped $ 60,000 100,000 40,000 120,000 100,000 80,000 $500,000 200 400 16,000 20,000 800 80,000 The company estimated 10,000 labor hours would be worked in all of Year 2. Assume the following activities occurred in February of Year 2: Razors Slims Eagles 3,000 $8,000 2,000 $5,000 200 4 300 16 Number of Units Produced ...................... Direct Materials Costs ........... Direct Labor Hours .......... Number of Production Runs .... Number of Orders .............. Pounds of Material Used . . . . . . . . . . . ........: Machine Hours ....... Number of Inspections ............. Units Shipped ........... Direct labor costs are $20 per hour ............ 1,000 $4,000 100 10 16 300 400 20 1,000 $2,000 800 500 400 800 3,000 $6,000 2,000 $4,000
